UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
(Mark One)
|
| |
x þ |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 20052006 OR |
| | |
OR
|
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number: 1-15829
FEDEX CORPORATION
(Exact name of registrant as specified in its charter)
| | |
Delaware (State or other jurisdiction of incorporation or organization) |
| 62-1721435 (I.R.S. Employer Identification No.) |
| | |
942 South Shady Grove Road Memphis, Tennessee (Address of principal executive offices) |
| 38120 (ZIP Code) |
(901) 818-7500
(Registrant’s telephone number, including area code)
|
(901) 818-7500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
xþ No
o¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).Act. (Check one):
Large accelerated filerþ Yes Accelerated filerx¨ No Non-accelerated filero¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o¨ No
xþIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock
|
| | Outstanding Shares at September 16, 2005
|
|
Common Stock Common Stock, par value $0.10 per share | 303,038,948
| Outstanding Shares at September 18, 2006 306,633,491 |
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
| | August 31, | | | |
| | 2005 | | May 31, | |
| | (Unaudited) | | 2005 | |
ASSETS | | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | | $ | 1,051 | | | $ | 1,039 | |
Receivables, less allowances of $137 and $125 | | | 3,270 | | | 3,297 | |
Spare parts, supplies and fuel, less | | | | | | | |
allowances of $144 and $142 | | | 251 | | | 250 | |
Deferred income taxes | | | 510 | | | 510 | |
Prepaid expenses and other | | | 164 | | | 173 | |
Total current assets | | | 5,246 | | | 5,269 | |
PROPERTY AND EQUIPMENT, AT COST | | | 22,650 | | | 22,017 | |
Less accumulated depreciation and amortization | | | 12,670 | | | 12,374 | |
Net property and equipment | | | 9,980 | | | 9,643 | |
OTHER LONG-TERM ASSETS | | | | | | | |
Goodwill | | | 2,835 | | | 2,835 | |
Prepaid pension cost | | | 1,177 | | | 1,272 | |
Intangible and other assets | | | 1,348 | | | 1,385 | |
Total other long-term assets | | | 5,360 | | | 5,492 | |
| | | $ | 20,586 | | | $ | 20,404 | |
ASSETS | | | | | | | | |
| | August 31, | | | | |
| | 2006 | | | May 31, | |
| | (Unaudited) | | | 2006 | |
CURRENT ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 2,690 | | | $ | 1,937 | |
Receivables, less allowances of $138 and $144 | | | 3,624 | | | | 3,516 | |
Spare parts, supplies and fuel, less allowances of $152 and $150 | | | 320 | | | | 308 | |
Deferred income taxes | | | 536 | | | | 539 | |
Prepaid expenses and other | | | 172 | | | | 164 | |
| | | | | | |
Total current assets | | | 7,342 | | | | 6,464 | |
PROPERTY AND EQUIPMENT, AT COST | | | 24,724 | | | | 24,074 | |
Less accumulated depreciation and amortization | | | 13,609 | | | | 13,304 | |
| | | | | | |
Net property and equipment | | | 11,115 | | | | 10,770 | |
OTHER LONG-TERM ASSETS | | | | | | | | |
Goodwill | | | 2,825 | | | | 2,825 | |
Prepaid pension cost | | | 1,351 | | | | 1,349 | |
Intangible and other assets | | | 1,245 | | | | 1,282 | |
| | | | | | |
Total other long-term assets | | | 5,421 | | | | 5,456 | |
| | | | | | |
| | $ | 23,878 | | | $ | 22,690 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3-3-
FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
| | August 31, | | | |
| | 2005 | | May 31, | |
| | (Unaudited) | | 2005 | |
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Current portion of long-term debt | | | $ | 295 | | | $ | 369 | |
Accrued salaries and employee benefits | | | 935 | | | 1,275 | |
Accounts payable | | | 1,705 | | | 1,739 | |
Accrued expenses | | | 1,590 | | | 1,351 | |
Total current liabilities | | | 4,525 | | | 4,734 | |
LONG-TERM DEBT, LESS CURRENT PORTION | | | 2,408 | | | 2,427 | |
OTHER LONG-TERM LIABILITIES | | | | | | | |
Deferred income taxes | | | 1,149 | | | 1,206 | |
Pension, postretirement healthcare and other benefit obligations | | | 841 | | | 828 | |
Self-insurance accruals | | | 644 | | | 621 | |
Deferred lease obligations | | | 629 | | | 532 | |
Deferred gains, principally related to aircraft transactions | | | 393 | | | 400 | |
Other liabilities | | | 68 | | | 68 | |
Total other long-term liabilities | | | 3,724 | | | 3,655 | |
COMMITMENTS AND CONTINGENCIES | | | | | | | |
COMMON STOCKHOLDERS’ INVESTMENT | | | | | | | |
Common stock, $0.10 par value; 800 million shares | | | | | | | |
authorized; 303 million shares issued as of August 31, 2005 | | | | | | | |
and 302 million shares issued as of May 31, 2005 | | | 30 | | | 30 | |
Additional paid-in capital | | | 1,277 | | | 1,241 | |
Retained earnings | | | 8,678 | | | 8,363 | |
Accumulated other comprehensive loss | | | (12 | ) | | (17 | ) |
Deferred compensation and treasury stock, at cost | | | (44 | ) | | (29 | ) |
Total common stockholders’ investment | | | 9,929 | | | 9,588 | |
| | | $ | 20,586 | | | $ | 20,404 | |
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | | |
| | August 31, | | | | |
| | 2006 | | | May 31, | |
| | (Unaudited) | | | 2006 | |
CURRENT LIABILITIES | | | | | | | | |
Current portion of long-term debt | | $ | 1,130 | | | $ | 850 | |
Accrued salaries and employee benefits | | | 1,025 | | | | 1,325 | |
Accounts payable | | | 1,875 | | | | 1,908 | |
Accrued expenses | | | 1,593 | | | | 1,390 | |
| | | | | | |
Total current liabilities | | | 5,623 | | | | 5,473 | |
LONG-TERM DEBT, LESS CURRENT PORTION | | | 2,090 | | | | 1,592 | |
OTHER LONG-TERM LIABILITIES | | | | | | | | |
Deferred income taxes | | | 1,369 | | | | 1,367 | |
Pension, postretirement healthcare and other benefit obligations | | | 953 | | | | 944 | |
Self-insurance accruals | | | 715 | | | | 692 | |
Deferred lease obligations | | | 660 | | | | 658 | |
Deferred gains, principally related to aircraft transactions | | | 365 | | | | 373 | |
Other liabilities | | | 82 | | | | 80 | |
| | | | | | |
Total other long-term liabilities | | | 4,144 | | | | 4,114 | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
COMMON STOCKHOLDERS’ INVESTMENT | | | | | | | | |
Common stock, $0.10 par value; 800 million shares authorized; 307 million shares issued as of August 31, 2006 and 306 million shares issued as of May 31, 2006 | | | 31 | | | | 31 | |
Additional paid-in capital | | | 1,500 | | | | 1,438 | |
Retained earnings | | | 10,516 | | | | 10,068 | |
Accumulated other comprehensive loss | | | (24 | ) | | | (24 | ) |
Treasury stock, at cost | | | (2 | ) | | | (2 | ) |
| | | | | | |
Total common stockholders’ investment | | | 12,021 | | | | 11,511 | |
| | | | | | |
| | $ | 23,878 | | | $ | 22,690 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4-4-
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
| | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | August 31, | | | August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
REVENUES | | | $ | 7,707 | | | $ | 6,975 | | | $ | 8,545 | | $ | 7,707 | |
OPERATING EXPENSES: | | | | | | | | |
Salaries and employee benefits | | | 3,062 | | | 2,920 | | | 3,285 | | 3,062 | |
Purchased transportation | | | 771 | | | 681 | | | 896 | | 771 | |
Rentals and landing fees | | | 665 | | | 551 | | | 570 | | 665 | |
Depreciation and amortization | | | 370 | | | 360 | | | 399 | | 370 | |
Fuel | | | 728 | | | 483 | | | 941 | | 728 | |
Maintenance and repairs | | | 468 | | | 428 | | | 515 | | 468 | |
Other | | | 1,059 | | | 973 | | | 1,155 | | 1,059 | |
| | | 7,123 | | | 6,396 | | | | | | |
| | | 7,761 | | 7,123 | |
| | | | | | |
OPERATING INCOME | | | 584 | | | 579 | | | 784 | | 584 | |
OTHER INCOME (EXPENSE): | | | | | | | | |
Interest, net | | | (24 | ) | | (39 | ) | | | (9 | ) | | | (24 | ) |
Other, net | | | (11 | ) | | (6 | ) | | | (5 | ) | | | (11 | ) |
| | | (35 | ) | | (45 | ) | | | | | |
| | | | (14 | ) | | | (35 | ) |
| | | | | | |
INCOME BEFORE INCOME TAXES | | | 549 | | | 534 | | | 770 | | 549 | |
PROVISION FOR INCOME TAXES | | | 210 | | | 204 | | | 295 | | 210 | |
| | | | | | |
NET INCOME | | | $ | 339 | | | $ | 330 | | | $ | 475 | | $ | 339 | |
| | | | | | |
EARNINGS PER COMMON SHARE: | | | | | | | | |
Basic | | | $ | 1.12 | | | $ | 1.10 | | | $ | 1.55 | | $ | 1.12 | |
| | | | | | |
Diluted | | | $ | 1.10 | | | $ | 1.08 | | | $ | 1.53 | | $ | 1.10 | |
DIVIDENDS DECLARED PER COMMON | | | | | | | | |
SHARE | | | $ | 0.08 | | | $ | 0.07 | | |
| | | | | | |
DIVIDENDS DECLARED PER COMMON SHARE | | | $ | 0.09 | | $ | 0.08 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5-5-
FEDEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
| | | | | | | | | |
| | | Three Months Ended | |
| | Three Months Ended August 31, | | | August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
Operating Activities: | | | | | | |
Net income | | $ | 339 | | $ | 330 | | | $ | 475 | | $ | 339 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | |
Lease accounting charge | | 79 | | — | | |
Depreciation and amortization | | 368 | | 360 | | | 399 | | 368 | |
Provision for uncollectible accounts | | 29 | | 25 | | | 29 | | 29 | |
Lease accounting charge | | | — | | 79 | |
Deferred income taxes and other noncash items | | (31 | ) | (20 | ) | | 13 | | | (31 | ) |
Changes in operating assets and liabilities: | | | | | | |
Receivables | | (3 | ) | 72 | | | | (138 | ) | | | (3 | ) |
Spare parts and supplies | | 7 | | 8 | | |
Other current assets | | | | (13 | ) | | 7 | |
Accounts payable and other operating liabilities | | (82 | ) | (109 | ) | | | (85 | ) | | | (82 | ) |
Other, net | | 77 | | 71 | | | | (15 | ) | | 77 | |
| | | | | | |
Net cash provided by operating activities | | 783 | | 737 | | | 665 | | 783 | |
Investing Activities: | | | | | | |
Capital expenditures | | (671 | ) | (395 | ) | | | (699 | ) | | | (671 | ) |
Proceeds from asset dispositions | | 1 | | 4 | | | 5 | | 1 | |
| | | | | | |
Net cash used in investing activities | | (670 | ) | (391 | ) | | | (694 | ) | | | (670 | ) |
Financing Activities: | | | | | | |
Proceeds from debt issuance | | | 999 | | — | |
Principal payments on debt | | (95 | ) | (13 | ) | | | (221 | ) | | | (95 | ) |
Proceeds from stock issuances | | 18 | | 30 | | | 30 | | 18 | |
Excess tax benefit on the exercise of stock options | | | 6 | | — | |
Dividends paid | | (24 | ) | (21 | ) | | | (28 | ) | | | (24 | ) |
Net cash used in financing activities | | (101 | ) | (4 | ) | |
Other, net | | | | (4 | ) | | — | |
| | | | | | |
Net cash provided by (used in) financing activities | | | 782 | | | (101 | ) |
| | | | | | |
Net increase in cash and cash equivalents | | 12 | | 342 | | | 753 | | 12 | |
Cash and cash equivalents at beginning of period | | 1,039 | | 1,046 | | | 1,937 | | 1,039 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 1,051 | | $ | 1,388 | | | $ | 2,690 | | $ | 1,051 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6-6-
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with our Annual Report on Form 10-K,
as amended, for the year ended May 31,
2005.2006 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of August 31,
20052006 and the results of our operations and cash flows for the three-month periods ended August 31,
20052006 and
2004.2005. Operating results for the three-month period ended August 31,
20052006 are not necessarily indicative of the results that may be expected for the year ending May 31,
2006.2007.
Except as otherwise specified, references to years indicate our fiscal year ending May 31,
20062007 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.
Certain prior period amounts have been reclassified to conform to the current period’s presentation.
GUARANTEES. FedEx’s publicly held debt is guaranteed by our subsidiaries. The guarantees are full and unconditional, joint and several, and any subsidiaries that are not guarantors are minor as defined by Securities and Exchange Commission (“SEC”) regulations. FedEx, as the parent company issuer of this debt, has no independent assets or operations. There are no significant restrictions on our ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.EMPLOYEES UNDER COLLECTIVE BARGAINING ARRANGEMENTS.The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations withAugust 2006, FedEx Express and the pilots’ union beganreached a tentative agreement on a new labor contract. The proposed new contract includes signing bonuses and other compensation that would result in March 2004. These negotiations are ongoing and have recently included private facilitation sessionsa charge in an effort to make progress. Wethe period of ratification of approximately $145 million. Contract ratification is expected during the second quarter of 2007 but cannot estimatebe assured. If ratified, the financial impact, if any, the results of these negotiations may have on our future results of operations.
new four-year contract will become amendable in 2010.
DIVIDENDS DECLARED PER COMMON SHARE.On August 19, 2005,18, 2006, our Board of Directors declared a dividend of $0.08$0.09 per share of common stock. The dividend is payablewill be paid on October 3, 20052, 2006 to stockholders of record as of the close of business on September 12, 2005.11, 2006. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we evaluate our dividend payment amount on an annual basis at the end of each fiscal year.
BUSINESS ACQUISITIONS.On September 3, 2006, we acquired the less-than-truckload (“LTL”) operations of Watkins Motor Lines (“Watkins”), a privately held company, and certain affiliates for approximately $780 million in cash. Watkins is a leading provider of long-haul LTL services. Watkins is being rebranded as FedEx National LTL and will be included in the FedEx Freight segment commencing in the second quarter of 2007.
On January 24, 2006, FedEx Express entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire DTW Group’s 50% share of the FedEx-DTW International Priority express joint venture (“FedEx-DTW”) and DTW Group’s domestic express network in China for approximately $400 million in cash. This acquisition will convert our joint venture with DTW Group, formed in 1999 and currently accounted for under the equity method, into a wholly-owned subsidiary and increase our presence in China in the international and domestic express businesses. The acquisition is expected to be completed
-7-
during 2007, subject to customary closing conditions. The financial results of this transaction will be included in the FedEx Express segment from the date of acquisition.
LEASE ADJUSTMENTADJUSTMENT.. DuringOur results for the first quarter of 2006 included a one-time, non-cashnoncash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) was recorded,share), which represented the impact on prior years to adjust the accounting for certain facility leases, predominantly at FedEx Express. The charge related primarily to rent escalations in on-airport facility leases. Statement of Financial Accounting Standards No. (“SFAS”) 13, “Accounting for Leases” andleases that were not being recognized appropriately.
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board (“FASB”)
Technical Bulletinissued FASB Interpretation No.
85-3,(“FIN”) 48, “Accounting for
Operating Leases with Scheduled Rent Increases,Uncertainty in Income Taxes,”
provides that rent expense under operating leases with rent escalation clauses7
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
shouldin July 2006. The new rules will be recognized evenly,effective for FedEx in 2008. We are evaluating this interpretation, but do not presently anticipate its adoption will have a material impact on a straight-line basis over the lease term. Based on a more extensive review of our leases during the first quarter, we determined that a portion of our facility leases had rent escalation clauses that were not being recognized appropriately. Because the amounts involved were not material to our financial statements in any individual prior periodstatements.
(2)Stock Compensation
On June 1, 2006 we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” which requires recognition of compensation expense for stock-based awards using a fair value method. SFAS 123R is a revision of SFAS 123, “Accounting for Stock-Based Compensation” and
the cumulative amount is not expected to be material to 2006 results, we recorded the cumulative adjustment in the first quarter, which increased operating expenses by $79 million.STOCK COMPENSATION. We currently applysupersedes Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,Employees.” Prior to the adoption of SFAS 123R, we applied APB 25 and its related interpretations to measure compensation expense for stock-based compensation plans. As a result, no compensation expense iswas recorded for stock options, whenas the exercise price iswas equal to or greater than the market price of our common stock at the date of grant. For awards
We adopted SFAS 123R using the modified prospective method, which resulted in prospective recognition of restricted stock andcompensation expense for all outstanding unvested share-based payments to determine the pro forma effects of stock options set forth below, we recognizeemployees based on the fair value on the original grant date. Under this method of adoption, our financial statement amounts for the awards ratably over their explicit service period.prior period presented have not been restated.
Our total share-based compensation expense was $31 million for the three months ended August 31, 2006. The impact of adopting SFAS 123R was approximately $22 million ($16 million, net of tax) or $0.05 per basic and diluted share, which is not material to earnings or cash flows for the quarter. A comparable amount would have been recognized in the first quarter of 2006 had these accounting rules been applied.
If compensation cost for stock-based compensation plans had been determined under SFAS 123, “Accounting for Stock Based Compensation,”-8-
For the three months ended August 31, 2005, stock option compensation expense, pro forma net income and basic and diluted earnings per common share, assuming all options granted in 1996 and thereafter were valuedif determined under SFAS 123 at fair value using the Black-Scholes method, would have been as follows (in millions, except for per share amounts):
| | Three Months Ended August 31, | |
| | 2005 | | 2004 | |
Net income, as reported | | $ | 339 | | $ | 330 | |
Add: Stock compensation included in reported net income, net of tax | | (1 | ) | 1 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit | | 11 | | 10 | |
Pro forma net income | | $ | 327 | | $ | 321 | |
Earnings per common share: | | | | | |
Basic—as reported | | $ | 1.12 | | $ | 1.10 | |
Basic—pro forma | | $ | 1.08 | | $ | 1.07 | |
Diluted—as reported | | $ | 1.10 | | $ | 1.08 | |
Diluted—pro forma | | $ | 1.06 | | $ | 1.05 | |
| | | | |
Net income, as reported | | $ | 339 | |
Add: Stock compensation included in reported net income, net of tax | | | (1 | ) |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit | | | 11 | |
| | | |
Pro forma net income | | $ | 327 | |
| | | |
Earnings per common share: | | | | |
Basic — as reported | | $ | 1.12 | |
| | | |
Basic — pro forma | | $ | 1.08 | |
| | | |
Diluted — as reported | | $ | 1.10 | |
| | | |
Diluted — pro forma | | $ | 1.06 | |
| | | |
We use the Black-Scholes option pricing model to calculate the fair value of stock options. We recognize stock-based compensation expense on a straight-line basis over the requisite service period of the award in the “Salaries and employee benefits” caption of our income statement. The intrinsic value of options exercised during the first quarter of 2007 was $33 million.
For unvested stock options and restricted stock awards granted prior to June 1, 2006, the terms of these awards provide for continued vesting subsequent to the employee’s retirement. Compensation expense associated with these awards is recognized on a straight-line basis over the shorter of the remaining service or vesting period. This provision was removed from all stock option awards granted subsequent to May 31, 2006.
As of August 31, 2006, there was $192 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation arrangements. This compensation expense is expected to be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately four years.
The key terms of the stock options and restricted stock granted under our incentive stock plans are set forth in our Annual Report. At August 31, 2006, there were 6,408,749 shares available for future grants under these plans.
8-9-
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Following is a table of the key weighted-average assumptions used in the valuation calculations under both SFAS 123R and SFAS 123 for the options andgranted during the periods presented. See our Annual Report for a discussion of our methodology for developing each of the assumptions used in the valuation model:
| | | | | | | | | |
| | | Three Months Ended | |
| | Three Months Ended August 31, | | | August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
Expected lives | | 5 years | | 4 years | | | 5 years | | 5 years |
Expected volatility | | 25 | % | 27 | % | | | 22 | % | | | 25 | % |
Risk-free interest rate | | 3.68 | % | 3.55 | % | | | 4.99 | % | | | 3.68 | % |
Dividend yield | | 0.323 | % | 0.328 | % | | | 0.299 | % | | | 0.323 | % |
Forfeiture rate | | | | 8 | % | | | 8 | % |
Expected Lives. This is
The following table summarizes information about stock option and restricted stock activity for the period of time over which thethree months ended August 31, 2006:
| | | | | | | | | | | | | | | | | | | | |
| | Stock Options Outstanding | | | Restricted Stock | |
| | | | | | Weighted- | | | | | | | | | | | |
| | | | | | average | | | | | | | | | | | |
| | Shares | | | exercise price | | | Fair Value | | | Shares | | | Fair Value | |
Outstanding at June 1, 2006 | | | 17,099,526 | | | $ | 60.82 | | | $ | 307,436,781 | | | | 583,106 | | | $ | 44,941,947 | |
Granted | | | 1,644,965 | | | | 110.33 | | | | 52,775,290 | | | | 161,857 | | | | 17,843,307 | |
Exercised | | | (565,074 | ) | | | 53.57 | | | | (9,174,511 | ) | | | (241,266 | ) | | | (16,631,329 | ) |
Forfeited | | | (57,080 | ) | | | 76.97 | | | | (1,242,232 | ) | | | (1,099 | ) | | | (95,294 | ) |
| | | | | | | | | | | | | | | | |
Outstanding at August 31, 2006 | | | 18,122,337 | | | | 65.53 | | | $ | 349,795,328 | | | | 502,598 | | | $ | 46,058,631 | |
| | | | | | | | | | | | | | | | |
The options granted
are expected to remain outstanding. Generally, options granted have a maximum term of ten years. We examine actual stock option exercises to determine the expected life of the options. An increase in the
expected term will increase compensation expense.Expected Volatility. Actual changes in the market value of our stockthree months ended August 31, 2006 are usedprimarily related to calculate the volatility assumption. We calculate daily market value changes from the date of grant over a past period equal to the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted at the date of grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
Dividend Yield. This is the annual rate of dividends per share over the exercise price of the option. An increase in the dividend yield will decrease compensation expense.
Forfeiture Rate. This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This percentage is derived from historical experience. An increase in the forfeiture rate will decrease compensation expense. Our forfeiture rate is approximately 8%.
During the first quarter of 2006, we made option grants of 2,806,235 shares at a weighted-average exercise price of $89.66 per share, primarily in connection with our principal annual stock option grant.grant in June 2006. The weighted-average Black-Scholes value of these grants under the assumptions indicated above was $25.38$32.08 per option.
The following table summarizes information about vested and nonvested stock options as of June 1, 2006 and August 31, 2006:
| | | | | | | | | | | | | | | | |
| | June 1, 2006 | | | August 31, 2006 | |
| | Shares | | | Fair Value | | | Shares | | | Fair Value | |
Vested | | | 9,665,894 | | | $ | 144,823,786 | | | | 11,778,653 | | | $ | 189,087,443 | |
Nonvested | | | 7,433,632 | | | | 162,612,995 | | | | 6,343,684 | | | | 160,707,885 | |
| | | | | | | | | | | | |
Total | | | 17,099,526 | | | $ | 307,436,781 | | | | 18,122,337 | | | $ | 349,795,328 | |
| | | | | | | | | | | | |
During the three months ended August 31, 2006, 2,677,833 stock options vested with a fair value of $53 million.Total equity compensation shares outstanding or available for grant at August 31, 20052006 represented 6.6%7.8% of the total outstanding common and equity compensation shares and equity compensation shares available for grant.
-10-
NEW ACCOUNTING PRONOUNCEMENTS. In December 2004, the FASB issued SFAS 123R, “Share-Based Payment.” SFAS 123R is a revision
The following table summarizes information regarding stock options outstanding as of
SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in the first quarter of 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.9
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, as well as the assumptions and the fair value model used to value them, and the market value of our common stock. We anticipate that the impact of SFAS 123R will approximate the pro forma results under SFAS 123 presented above (reducing earnings per diluted share in the first quarter of 2006 and 2005 by $0.04 and $0.03, respectively). SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. Based on historical experience, we do not expect the impact of adopting SFAS 123R to be material to our reported cash flows.
In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN 47 will be effective for FedEx no later than MayAugust 31, 2006. Management is in the process of evaluating the impact, if any, FIN 47 will have on FedEx.
(2)2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted- | | | Weighted- | | | | | | | | | | | Weighted- | | | | |
| | | | | | Average | | | Average | | | Aggregate | | | | | | | Average | | | Aggregate | |
Range of | | Number | | | Remaining | | | Exercise | | | Intrinsic | | | Number | | | Exercise | | | Intrinsic | |
Exercise Prices | | Outstanding | | | Contractual Life | | | Price | | | Value | | | Exercisable | | | Price | | | Value | |
$15.34 - 22.16 | | | 62,874 | | | 1.7 years | | $ | 16.85 | | | | | | | | 62,874 | | | $ | 16.85 | | | | | |
23.81 - - 35.69 | | | 1,632,761 | | | 1.5 years | | | 30.17 | | | | | | | | 1,632,761 | | | | 30.17 | | | | | |
35.89 - - 53.77 | | | 5,181,650 | | | 4.9 years | | | 44.69 | | | | | | | | 5,172,150 | | | | 44.68 | | | | | |
55.94 - - 83.73 | | | 6,212,200 | | | 6.6 years | | | 66.68 | | | | | | | | 4,123,294 | | | | 64.80 | | | | | |
84.57 - - 117.59 | | | 5,032,852 | | | 9.1 years | | | 97.62 | | | | | | | | 787,674 | | | | 90.07 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$15.34 - 117.59 | | | 18,122,337 | | | 6.3 years | | $ | 65.53 | | | $ | 636,184,069 | | | | 11,778,753 | | | $ | 52.60 | | | $ | 565,755,727 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table provides a reconciliation of net income reported in our financial statements to comprehensive income (in millions):
| | | | | | | | | |
| | Three Months Ended August 31, | | | Three Months Ended August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
Net income | | $ | 339 | | $ | 330 | | | $ | 475 | | $ | 339 | |
Other comprehensive income: | | | | | | |
Foreign currency translation adjustments, net of deferred taxes of $1 for both 2005 and 2004 | | 5 | | 8 | | |
Foreign currency translation adjustments, net of deferred taxes of $1 in 2005 | | | — | | 5 | |
| | | | | | |
Comprehensive income | | $ | 344 | | $ | 338 | | | $ | 475 | | $ | 344 | |
| | | | | | |
(3)
(4)Financing Arrangements From time to time, we finance certain operating and investing activities, including acquisitions, through borrowings under our $1.0 billion revolving credit facility or the issuance of commercial paper.
In July 2005, we executed a new $1.0 billion five-yearThe revolving credit
facility,agreement contains certain covenants and restrictions, none of which
replaced and consolidatedare expected to significantly affect our
prior revolving credit facilities. Borrowings under the credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rateoperations or
the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.10
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
ability to pay dividends. Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. At August 31, 2005,2006, no commercial paper borrowings were outstanding and the entire amount under the credit facility was available.
On August 2, 2006, we filed an updated shelf registration statement with the SEC. The revolving credit agreement contains certain covenantsnew registration statement does not limit the amount of any future offering. By using this shelf registration statement, we may sell, in one or more future offerings, any combination of our unsecured debt securities and restrictions, nonecommon stock.
On August 8, 2006, under the new shelf registration statement, we issued $1 billion of whichsenior unsecured debt, comprised of floating rate notes totaling $500 million due in August 2007 and fixed rate notes totaling $500 million due in August 2009. The floating rate notes bear interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 0.08%, reset on a quarterly basis. At August 31, 2006, the floating interest rate was 5.58%. The fixed rate notes bear interest at an annual rate of 5.5%, payable semi-annually. We are expected to significantly affect our operations or ability to pay dividends.using the net proceeds for working capital and general corporate purposes, including the funding of acquisitions.
(4)-11-
(5)Computation of Earnings Per Share The calculation of basic and diluted earnings per common share for the three-month periods ended August 31 was as follows (in millions, except per share amounts):
| | 2005 | | 2004 | | | | | | | | | |
Net income applicable to common stockholders | | $ | 339 | | $ | 330 | | |
| | | 2006 | | 2005 | |
Net income | | | $ | 475 | | $ | 339 | |
| | | | | | |
Weighted-average shares of common stock outstanding | | 303 | | 300 | | | 306 | | 303 | |
Common equivalent shares: | | | | | | |
Assumed exercise of outstanding dilutive options | | 17 | | 19 | | | 17 | | 17 | |
Less shares repurchased from proceeds of assumed exercise of options | | (12 | ) | (14 | ) | | | (13 | ) | | | (12 | ) |
| | | | | | |
Weighted-average common and common equivalent shares outstanding | | 308 | | 305 | | | 310 | | 308 | |
| | | | | | |
Basic earnings per common share | | $ | 1.12 | | $ | 1.10 | | | $ | 1.55 | | $ | 1.12 | |
| | | | | | |
Diluted earnings per common share | | $ | 1.10 | | $ | 1.08 | | | $ | 1.53 | | $ | 1.10 | |
| | | | | | |
We have excluded from the calculation of diluted earnings per share approximately
3,195,0351.7 million antidilutive options for the three months ended August 31, 2006 and approximately 3.2 million antidilutive options for the three months ended August 31, 2005, as the exercise price of
thethese options was greater than the average market price of common stock for the period.
(5)
(6)Employee Benefit Plans We sponsor defined benefit pension plans covering a majority of our employees. The largest plan covers certain U.S. employees age 21 and over, with at least one year of service. Certain of our subsidiaries also offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. Net periodic benefit cost of the pension and postretirement healthcare plans for the three-month periods ended August 31 was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | | Postretirement | | | Postretirement | |
| | Pension Plans | | Healthcare Plans | | | Pension Plans | | Healthcare Plans | |
| | 2005 | | 2004 | | 2005 | | 2004 | | | 2006 | | 2005 | | 2006 | | 2005 | |
Service cost | | $ | 119 | | $ | 104 | | | $ | 10 | | | | $ | 9 | | | | $ | 132 | | $ | 119 | | $ | 8 | | $ | 10 | |
Interest cost | | 161 | | 145 | | | 8 | | | | 8 | | | | 177 | | 161 | | 7 | | 8 | |
Expected return on plan assets | | (203 | ) | (175 | ) | | — | | | | — | | | | | (232 | ) | | | (203 | ) | | — | | — | |
Recognized actuarial losses | | 26 | | 15 | | | — | | | | — | | | |
Other amortization | | 3 | | 3 | | | — | | | | — | | | |
Recognized actuarial losses/(gains) | | | 34 | | 26 | | | (1 | ) | | — | |
Amortization of prior service cost | | | 3 | | 3 | | — | | — | |
| | $ | 106 | | $ | 92 | | | $ | 18 | | | | $ | 17 | | | | | | | | | | | |
| | | $ | 114 | | $ | 106 | | $ | 14 | | $ | 18 | |
| | | | | | | | | | |
11
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
No
We made tax-deductible voluntary contributions were madeto our qualified U.S. domestic pension plans of $100 million during the first quarter of 2007, and made no contributions during the first quarter of 2006. On September 1, 2006, or 2005we made additional tax-deductible voluntary contributions to our principalqualified U.S. domestic pension plans. However, onplans of $382 million. On September 1, 2005, we made tax-deductible voluntary tax deductible contributions oftotaling $456 million to our principalqualified U.S. domestic pension plans. During 2005, we made primarily voluntary contributions of $460 million to our qualified pension plans. We may elect to make further voluntary contributions to our qualified plans in 2006.
(6)-12-
(7)Business Segment Information We provide a broad portfolio of transportation, e-commerce and business services through companies operating companies that competeindependently, competing collectively and are managed collaboratively under the respected FedEx brands.brand. Our operations are primarily represented by Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; FedEx Freight Corporation (“FedEx Freight”), a leading U.S. provider of regional less-than-truckload (“LTL”)LTL freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These businesses form the core of our reportable segments. Management evaluates segment financial performance based on operating income.
FedEx Corporate Services, Inc. (“FedEx Services”) provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these functions are allocated based on metrics such as relative revenues or estimated services provided. We also allocate costs for administrative functions provided between operating companies and certain other costs such as costs associated with services received for general corporate oversight, including executive officers and certain legal and finance functions. We believe these allocations approximate the cost of providing these functions.
Effective June 1, 2006, we moved the credit, collections and customer service functions with responsibility for FedEx Express and FedEx Ground customer information from FedEx Express into a newly formed subsidiary of FedEx Services named FedEx Customer Information Services, Inc. (“FCIS”). Also, effective June 1, 2006, we moved FedEx Supply Chain Services, Inc., the results of which were previously reported in the FedEx Ground segment, into a new subsidiary of FedEx Services named FedEx Global Supply Chain Services, Inc. The costs of providing these customer service functions and the net operating costs of FedEx Global Supply Chain Services are allocated back to the FedEx Express and FedEx Ground segments. Prior year amounts have not been reclassified to conform to the current year segment presentation as the financial results of all segments are materially comparable.
In addition, certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. FedEx Kinko’s segment revenues include package acceptance revenue, which represents the fee received by FedEx Kinko’s from FedEx Express and FedEx Ground for accepting and handling packages at FedEx Kinko’s locations on behalf of these operating companies. Package acceptance revenue does not include the external revenue associated with the actual shipments. All shipment revenues are reflected in the segment performing the transportation services. Intersegment revenues and expenses are eliminated in the consolidated results but are not separately identified in the following segment information as the amounts are not material.
Our-13-
As of August 31, 2006, our reportable segments includeincluded the following businesses:
| | |
FedEx Express Segment | | FedEx Express (express transportation) |
| FedEx Trade Networks (global trade services)
|
FedEx Ground Segment | | FedEx Ground (small-package ground delivery) |
| FedEx SmartPost (small-parcel consolidator)
|
| FedEx Supply Chain Services (contract logistics)
|
FedEx Freight Segment | | FedEx Freight (LTL(regional LTL freight transportation) |
| FedEx Custom Critical (time-critical transportation)
|
| Caribbean Transportation Services (airfreight forwarding)
|
FedEx Kinko’s Segment | | FedEx Kinko’s (document solutions and business services) |
12
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table provides a reconciliation of reportable segment revenues and operating income to our consolidated financial statement totals (in millions):
| | | | | | | | | |
| | | Three Months Ended | |
| | Three Months Ended August 31, | | | August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
Revenue | | | | | | |
FedEx Express segment | | $ | 5,122 | | $ | 4,616 | | | $ | 5,640 | | $ | 5,122 | |
FedEx Ground segment | | 1,219 | | 1,073 | | | 1,417 | | 1,219 | |
FedEx Freight segment | | 892 | | 807 | | | 1,013 | | 892 | |
FedEx Kinko's segment | | 517 | | 490 | | |
FedEx Kinko’s segment | | | 504 | | 517 | |
Other and eliminations | | (43 | ) | (11 | ) | | | (29 | ) | | | (43 | ) |
| | | | | | |
| | | $ | 8,545 | | $ | 7,707 | |
| | $ | 7,707 | | $ | 6,975 | | | | | | |
Operating Income | | | | | | |
FedEx Express segment(1) | | $ | 285 | | $ | 310 | | | $ | 467 | | $ | 285 | |
FedEx Ground segment | | 148 | | 147 | | | 157 | | 148 | |
FedEx Freight segment | | 135 | | 103 | | | 150 | | 135 | |
FedEx Kinko's segment | | 16 | | 19 | | |
FedEx Kinko’s segment | | | 10 | | 16 | |
Other and eliminations | | — | | — | | | — | | — | |
| | $ | 584 | | $ | 579 | | | | | | |
| | | $ | 784 | | $ | 584 | |
| | | | | | |
| | |
(1) | | FedEx Express segment results for the three months ended August 31, 2005 include a $75 million noncash charge to adjust the accounting for certain facility leases. |
(1) First quarter 2006 includes a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.-14-
(7)
As of August 31, 2005,2006, our purchase commitments for the remainder of 20062007 and annually thereafter under various contracts were as follows (in millions):
| | | | Aircraft- | | | | | | | | | | | | | | | | | | | | | |
| | Aircraft | | Related(1) | | Other(2) | | Total | | | Aircraft- | | | | | |
2006 (remainder) | | | $ | 85 | | | | $ | 150 | | | | $ | 593 | | | $ | 828 | | |
2007 | | | 293 | | | | 209 | | | | 132 | | | 634 | | |
| | | Aircraft | | Related(1) | | Other(2) | | Total | |
2007 (remainder) | | | $ | 149 | | $ | 101 | | $ | 753 | | $ | 1,003 | |
2008 | | | 255 | | | | 88 | | | | 57 | | | 400 | | | 431 | | 113 | | 217 | | 761 | |
2009 | | | 567 | | | | 57 | | | | 36 | | | 660 | | | 480 | | 61 | | 159 | | 700 | |
2010 | | | 517 | | | | 59 | | | | 18 | | | 594 | | | 659 | | 67 | | 104 | | 830 | |
2011 | | | 460 | | 66 | | 70 | | 596 | |
Thereafter | | | 625 | | | | 74 | | | | 167 | | | 866 | | | 157 | | 8 | | 218 | | 383 | |
|
(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts.
| | |
(1) | | Primarily aircraft modifications. |
|
(2) | | Primarily vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts. |
The amounts reflected in the table above for purchase commitments represent
noncancelablenon-cancelable agreements to purchase goods or services. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into non-cancelable
commitments.commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting
purposes.13
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
As of August 31, 2005, purposes and are not included in the table above.
FedEx Express wasis committed to purchase 12 Airbus A300s, four Airbus A310s, five ATR-72s and ten Airbus A380s (a new high-capacity, long-range aircraft). FedEx Express expects to take delivery of three A300s, two A310s and all of the ATR-72s in 2006. Five A300s and two A310s are expected to be delivered in 2007. The four remaining A300s are expected to be delivered in 2008. Three of the ten A380 aircraft are scheduled to be delivered in each of 2009, 2010 and 2011 and the remaining one in 2012.certain aircraft. Deposits and progress payments of $33$63 million have been made toward these purchases and other planned aircraft-related transactions. In addition, we have committed to modify our DC10 aircraft for passenger-to-freighter and two-man cockpit configurations. PaymentsFuture payments related to these activities are included in the table above. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of our aircraft purchase commitments as of August 31, 2006 with the year of expected delivery by type:
| | | | | | | | | | | | |
| | A300 | | | A380 | | | Total | |
2007 (remainder) | | | 4 | | | | — | | | | 4 | |
2008 | | | 9 | | | | — | | | | 9 | |
2009 | | | 4 | | | | 2 | | | | 6 | |
2010 | | | — | | | | 4 | | | | 4 | |
2011 | | | — | | | | 3 | | | | 3 | |
Thereafter | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | |
Total | | | 17 | | | | 10 | | | | 27 | |
| | | | | | | | | |
-15-
A summary of future minimum lease payments under capital leases at August 31, 20052006 is as follows (in millions):
2006 (remainder) | | $ | 22 | | |
2007 | | 22 | | |
| | | | | |
2007 (remainder) | | | $ | 17 | |
2008 | | 99 | | | 100 | |
2009 | | 10 | | | 12 | |
2010 | | 95 | | | 97 | |
2011 | | | 8 | |
Thereafter | | 130 | | | 144 | |
| | 378 | | | | |
| | | 378 | |
Less amount representing interest | | 72 | | | 70 | |
| | | | |
Present value of net minimum lease payments | | $ | 306 | | | $ | 308 | |
| | | | |
A summary of future minimum lease payments under noncancelablenon-cancelable operating leases with an initial or remaining term in excess of one year at August 31, 20052006 is as follows (in millions):
| | Aircraft and Related | | Facilities and | | | | | | | | | | | | | | | |
| | Equipment | | Other | | Total | | | Aircraft and Related | | Facilities and | | | |
2006 (remainder) | | | $ | 478 | | | | $ | 719 | | | $ | 1,197 | | |
2007 | | | 606 | | | | 857 | | | 1,463 | | |
| | | Equipment | | Other | | Total | |
2007 (remainder) | | | $ | 495 | | $ | 802 | | $ | 1,297 | |
2008 | | | 585 | | | | 721 | | | 1,306 | | | 586 | | 935 | | 1,521 | |
2009 | | | 555 | | | | 586 | | | 1,141 | | | 555 | | 775 | | 1,330 | |
2010 | | | 544 | | | | 470 | | | 1,014 | | | 544 | | 606 | | 1,150 | |
2011 | | | 526 | | 486 | | 1,012 | |
Thereafter | | | 4,460 | | | | 2,986 | | | 7,446 | | | 3,934 | | 2,962 | | 6,896 | |
| | | $ | 7,228 | | | | $ | 6,339 | | | $ | 13,567 | | | | | | | | |
| | | $ | 6,640 | | $ | 6,566 | | $ | 13,206 | |
| | | | | | | | |
While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.
FedEx Express makes payments under certain leveraged operating leases that are sufficient to pay principal and interest on certain pass-through certificates. The pass-through certificates are not direct obligations of, or guaranteed by, FedEx or FedEx Express.
14
FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(8)
Wage-and-HourWage-and-Hour.. We are a defendant in a number of lawsuits filed in federal or California state courts containing various class-action allegations under federal or California wage-and-hour laws. The plaintiffs in these lawsuits are employees of FedEx operating companies who allege, among other things, that they were forced to work “off the clock” and were not provided work breaks or other benefits. The plaintiffs generally seek unspecified monetary damages, injunctive relief, or both.
To date, one of these wage-and-hour cases,Foster v. FedEx Express, has been certified as a class action. The plaintiffs inFosterrepresent a class of hourly FedEx Express employees in California from October 14, 1998 to present. The plaintiffs allege that hourly employees are routinely required to work “off the clock” and are not paid for this additional work. The court issued a ruling onin December 13, 2004 granting class certification on all issues. In February 2006, the parties reached a settlement that received final approval from the court on September 18, 2006. FedEx Express denies liability in this matter, but entered into the settlement to avoid the cost and uncertainty of further litigation. The amount of the settlement was fully accrued at the end of the third quarter of 2006 and is not material to FedEx.
-16-
With respect to the other wage-and-hour cases, we have denied any liability and intend to vigorously defend ourselves. Given the nature and preliminary status of these other wage-and-hour claims, we cannot yet determine the amount or a reasonable range of potential loss in these other matters, if any.
Race Discrimination.On September 28, 2005, a California federal district court granted class certification inSatchell v. FedEx Express, a lawsuit alleging discrimination by FedEx Express in the Western region of the United States against certain current and former minority employees in pay and promotion. The district court’s ruling
however,on class certification is not a decision on the merits of the plaintiffs’ claim and does not address whether we will
ultimately be held liable. Trial
has beenis currently scheduled for
April 2006.February 2007. We have denied any liability with respect to these claims and intend to vigorously defend ourselfourselves in these cases. However,this case. Given the nature and preliminary status of the claim, we cannot yet determine the amount or a reasonable range of potential loss in this matter, if any. It is reasonably possible, however, that we could incur a material loss as this case develops.
On May 24, 2006, a jury ruled against FedEx Ground inIssa & Rizkallah v. FedEx Ground, a California state court lawsuit brought in July 2001 by two independent contractors who allege, among other things, that a FedEx Ground manager harassed and discriminated against them based upon their national origin. The jury awarded the two plaintiffs a total of $60 million (which includes $50 million of punitive damages), plus attorney’s fees and other litigation expenses. On September 5, 2006, the trial court reduced the total damage award to approximately $12 million (which includes over $10 million of punitive damages), plus attorney’s fees and other litigation expenses in an amount to be determined later. If the plaintiffs do not consent to the reduction of damages by October 5, 2006, FedEx Ground will be entitled to a new trial on the issue of damages. Based on the court’s ruling, we no longer believe that it is reasonably possible
thatwe could incur a material
losses could be incurredloss on
one or more of these matters as these cases develop.this matter.
Independent ContractorContractor.. FedEx Ground is involved in numerous purported class-action lawsuits and other proceedings
in whichthat claim that the
threshold issue is whether some or all of FedEx Ground’scompany’s owner-operators
are in factshould be treated as employees, rather than independent contractors.
These matters includeEstrada v. FedEx Ground, a class action involving single work area contractors that was filed in California state court. Although the trial court has granted some of the plaintiffs’ claims for relief in Estrada ($18 million, inclusive of attorney’s fees, plus equitable relief), we expect to prevail on appeal. Adverse determinations in these matters could, among other things, entitle certain of our contractors to the reimbursement of certain expenses and to the benefit of wage-and-hour laws and result in employment and withholding tax liability for FedEx Ground. On August 10, 2005, the Judicial Panel on Multi-District Litigation granted our motion to transfer and consolidate the majority of the class-action lawsuits for administration of the pre-trial proceedings by a single federal court
–— the U.S. District Court for the Northern District of Indiana.
We strongly believe that FedEx Ground’s owner-operators are properly classified as independent contractors and that we will prevail in these proceedings. Given the nature and preliminary status of thethese claims, we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.
FedEx Ground is also involved in several lawsuits, including two purported class actions, that claim that the drivers of the company’s independent contractors were jointly employed by the contractor and FedEx Ground. We strongly believe that FedEx Ground is not an employer of these drivers and that we will prevail in these proceedings. Given the nature and preliminary status of these claims, we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.
Other.FedEx and its subsidiaries are subject to other legal proceedings that arise in the ordinary course of their business. In the opinion of management, the aggregate liability, if any, with respect to these other actions will not materially adversely affect our financial position, results of operations or cash flows.
(9) -17-
(10)Supplemental Cash Flow Information
| | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | August 31, | | | August 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
| | (In millions) | | | (In millions) | |
Cash payments for: | | | | | | | | |
Interest (net of capitalized interest) | | | $ | 44 | | | $ | 55 | | | $ | 37 | | $ | 44 | |
Income taxes | | | 27 | | | 138 | | | 125 | | 27 | |
|
(11)Condensed Consolidating Financial Statements
On August 2, 2006, we released certain subsidiary guarantors from their respective guarantees of our public debt. As a result, we are required to present condensed consolidating financial information in order for the subsidiary guarantors (other than FedEx Express) to continue to be exempt from reporting under the Securities Exchange Act of 1934.
The guarantor subsidiaries, which are wholly-owned by FedEx, guarantee approximately $2.2 billion of our debt. The guarantees are full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other similar criteria, and as a result, the “Guarantor” and “Non-Guarantor” columns each include portions of our domestic and international operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.
15-18-
Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
August 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,360 | | | $ | 150 | | | $ | 180 | | | $ | — | | | $ | 2,690 | |
Receivables, less allowances | | | — | | | | 2,945 | | | | 700 | | | | (21 | ) | | | 3,624 | |
Spare parts, fuel, supplies, prepaid expenses and other, less allowances | | | 6 | | | | 436 | | | | 50 | | | | — | | | | 492 | |
Deferred income taxes | | | — | | | | 519 | | | | 17 | | | | — | | | | 536 | |
| | | | | | | | | | | | | | | |
Total current assets | | | 2,366 | | | | 4,050 | | | | 947 | | | | (21 | ) | | | 7,342 | |
PROPERTY AND EQUIPMENT, AT COST | | | 22 | | | | 23,047 | | | | 1,655 | | | | — | | | | 24,724 | |
Less accumulated depreciation and amortization | | | 12 | | | | 12,689 | | | | 908 | | | | — | | | | 13,609 | |
| | | | | | | | | | | | | | | |
Net property and equipment | | | 10 | | | | 10,358 | | | | 747 | | | | — | | | | 11,115 | |
INTERCOMPANY RECEIVABLE | | | — | | | | 454 | | | | 1,497 | | | | (1,951 | ) | | | — | |
GOODWILL | | | — | | | | 2,675 | | | | 150 | | | | — | | | | 2,825 | |
PREPAID PENSION COST | | | 1,313 | | | | 19 | | | | 19 | | | | — | | | | 1,351 | |
INVESTMENT IN SUBSIDIARIES | | | 12,775 | | | | 2,148 | | | | — | | | | (14,923 | ) | | | — | |
OTHER ASSETS | | | 78 | | | | 516 | | | | 684 | | | | (33 | ) | | | 1,245 | |
| | | | | | | | | | | | | | | |
| | $ | 16,542 | | | $ | 20,220 | | | $ | 4,044 | | | $ | (16,928 | ) | | $ | 23,878 | |
| | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 1,000 | | | $ | 130 | | | $ | — | | | $ | — | | | $ | 1,130 | |
Accrued salaries and employee benefits | | | 26 | | | | 872 | | | | 127 | | | | — | | | | 1,025 | |
Accounts payable | | | 35 | | | | 1,564 | | | | 297 | | | | (21 | ) | | | 1,875 | |
Accrued expenses | | | 40 | | | | 1,424 | | | | 129 | | | | — | | | | 1,593 | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | 1,101 | | | | 3,990 | | | | 553 | | | | (21 | ) | | | 5,623 | |
LONG-TERM DEBT, LESS CURRENT PORTION | | | 1,248 | | | | 842 | | | | — | | | | — | | | | 2,090 | |
INTERCOMPANY PAYABLE | | | 1,951 | | | | — | | | | — | | | | (1,951 | ) | | | — | |
OTHER LIABILITIES | | | | | | | | | | | | | | | | | | | | |
Deferred income taxes | | | — | | | | 1,144 | | | | 258 | | | | (33 | ) | | | 1,369 | |
Other liabilities | | | 228 | | | | 2,471 | | | | 76 | | | | — | | | | 2,775 | |
| | | | | | | | | | | | | | | |
Total other long-term liabilities | | | 228 | | | | 3,615 | | | | 334 | | | | (33 | ) | | | 4,144 | |
STOCKHOLDERS’ INVESTMENT | | | 12,014 | | | | 11,773 | | | | 3,157 | | | | (14,923 | ) | | | 12,021 | |
| | | | | | | | | | | | | | | |
| | $ | 16,542 | | | $ | 20,220 | | | $ | 4,044 | | | $ | (16,928 | ) | | $ | 23,878 | |
| | | | | | | | | | | | | | | |
-19-
CONDENSED CONSOLIDATING BALANCE SHEETS
May 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,679 | | | $ | 114 | | | $ | 144 | | | $ | — | | | $ | 1,937 | |
Receivables, less allowances | | | — | | | | 2,864 | | | | 681 | | | | (29 | ) | | | 3,516 | |
Spare parts, fuel, supplies, prepaid expenses and other, less allowances | | | 7 | | | | 423 | | | | 42 | | | | — | | | | 472 | |
Deferred income taxes | | | — | | | | 522 | | | | 17 | | | | — | | | | 539 | |
| | | | | | | | | | | | | | | |
Total current assets | | | 1,686 | | | | 3,923 | | | | 884 | | | | (29 | ) | | | 6,464 | |
PROPERTY AND EQUIPMENT, AT COST | | | 22 | | | | 22,430 | | | | 1,622 | | | | — | | | | 24,074 | |
Less accumulated depreciation and amortization | | | 12 | | | | 12,410 | | | | 882 | | | | — | | | | 13,304 | |
| | | | | | | | | | | | | | | |
Net property and equipment | | | 10 | | | | 10,020 | | | | 740 | | | | — | | | | 10,770 | |
INTERCOMPANY RECEIVABLE | | | — | | | | 680 | | | | 1,399 | | | | (2,079 | ) | | | — | |
GOODWILL | | | — | | | | 2,675 | | | | 150 | | | | — | | | | 2,825 | |
PREPAID PENSION COST | | | 1,310 | | | | 18 | | | | 21 | | | | — | | | | 1,349 | |
INVESTMENT IN SUBSIDIARIES | | | 12,301 | | | | 2,093 | | | | — | | | | (14,394 | ) | | | — | |
OTHER ASSETS | | | 69 | | | | 571 | | | | 675 | | | | (33 | ) | | | 1,282 | |
| | | | | | | | | | | | | | | |
| | $ | 15,376 | | | $ | 19,980 | | | $ | 3,869 | | | $ | (16,535 | ) | | $ | 22,690 | |
| | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 700 | | | $ | 150 | | | $ | — | | | $ | — | | | $ | 850 | |
Accrued salaries and employee benefits | | | 50 | | | | 1,107 | | | | 168 | | | | — | | | | 1,325 | |
Accounts payable | | | 33 | | | | 1,594 | | | | 310 | | | | (29 | ) | | | 1,908 | |
Accrued expenses | | | 37 | | | | 1,221 | | | | 132 | | | | — | | | | 1,390 | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | 820 | | | | 4,072 | | | | 610 | | | | (29 | ) | | | 5,473 | |
LONG-TERM DEBT, LESS CURRENT PORTION | | | 749 | | | | 843 | | | | — | | | | — | | | | 1,592 | |
INTERCOMPANY PAYABLE | | | 2,079 | | | | — | | | | — | | | | (2,079 | ) | | | — | |
OTHER LIABILITIES | | | | | | | | | | | | | | | | | | | | |
Deferred income taxes | | | — | | | | 1,143 | | | | 257 | | | | (33 | ) | | | 1,367 | |
Other liabilities | | | 226 | | | | 2,447 | | | | 74 | | | | — | | | | 2,747 | |
| | | | | | | | | | | | | | | |
Total other long-term liabilities | | | 226 | | | | 3,590 | | | | 331 | | | | (33 | ) | | | 4,114 | |
STOCKHOLDERS’ INVESTMENT | | | 11,502 | | | | 11,475 | | | | 2,928 | | | | (14,394 | ) | | | 11,511 | |
| | | | | | | | | | | | | | | |
| | $ | 15,376 | | | $ | 19,980 | | | $ | 3,869 | | | $ | (16,535 | ) | | $ | 22,690 | |
| | | | | | | | | | | | | | | |
-20-
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended August 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
REVENUES | | $ | — | | | $ | 7,468 | | | $ | 1,162 | | | $ | (85 | ) | | $ | 8,545 | |
OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 27 | | | | 2,870 | | | | 388 | | | | — | | | | 3,285 | |
Purchased transportation | | | — | | | | 729 | | | | 174 | | | | (7 | ) | | | 896 | |
Rentals and landing fees | | | — | | | | 514 | | | | 56 | | | | — | | | | 570 | |
Depreciation and amortization | | | — | | | | 362 | | | | 37 | | | | — | | | | 399 | |
Fuel | | | — | | | | 904 | | | | 37 | | | | — | | | | 941 | |
Maintenance and repairs | | | — | | | | 497 | | | | 18 | | | | — | | | | 515 | |
Intercompany charges, net | | | (50 | ) | | | (31 | ) | | | 81 | | | | — | | | | — | |
Other | | | 23 | | | | 1,037 | | | | 173 | | | | (78 | ) | | | 1,155 | |
| | | | | | | | | | | | | | | |
| | | — | | | | 6,882 | | | | 964 | | | | (85 | ) | | | 7,761 | |
| | | | | | | | | | | | | | | |
OPERATING INCOME | | | — | | | | 586 | | | | 198 | | | | — | | | | 784 | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | 475 | | | | 125 | | | | — | | | | (600 | ) | | | — | |
Interest, net | | | 1 | | | | (10 | ) | | | — | | | | — | | | | (9 | ) |
Intercompany charges, net | | | 1 | | | | (9 | ) | | | 8 | | | | — | | | | — | |
Other, net | | | (2 | ) | | | (1 | ) | | | (2 | ) | | | — | | | | (5 | ) |
| | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 475 | | | | 691 | | | | 204 | | | | (600 | ) | | | 770 | |
Provision for income taxes | | | — | | | | 237 | | | | 58 | | | | — | | | | 295 | |
| | | | | | | | | | | | | | | |
NET INCOME | | $ | 475 | | | $ | 454 | | | $ | 146 | | | $ | (600 | ) | | $ | 475 | |
| | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended August 31, 2005
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
REVENUES | | $ | — | | | $ | 6,773 | | | $ | 1,014 | | | $ | (80 | ) | | $ | 7,707 | |
OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 17 | | | | 2,701 | | | | 344 | | | | — | | | | 3,062 | |
Purchased transportation | | | — | | | | 625 | | | | 150 | | | | (4 | ) | | | 771 | |
Rentals and landing fees | | | 1 | | | | 610 | | | | 54 | | | | — | | | | 665 | |
Depreciation and amortization | | | 1 | | | | 333 | | | | 36 | | | | — | | | | 370 | |
Fuel | | | — | | | | 700 | | | | 28 | | | | — | | | | 728 | |
Maintenance and repairs | | | — | | | | 452 | | | | 16 | | | | — | | | | 468 | |
Intercompany charges, net | | | (36 | ) | | | (32 | ) | | | 68 | | | | — | | | | — | |
Other | | | 17 | | | | 953 | | | | 165 | | | | (76 | ) | | | 1,059 | |
| | | | | | | | | | | | | | | |
| | | — | | | | 6,342 | | | | 861 | | | | (80 | ) | | | 7,123 | |
| | | | | | | | | | | | | | | |
OPERATING INCOME | | | — | | | | 431 | | | | 153 | | | | — | | | | 584 | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | 339 | | | | 80 | | | | — | | | | (419 | ) | | | — | |
Interest, net | | | (16 | ) | | | (8 | ) | | | — | | | | — | | | | (24 | ) |
Intercompany charges, net | | | 20 | | | | (23 | ) | | | 3 | | | | — | | | | — | |
Other, net | | | (4 | ) | | | (3 | ) | | | (4 | ) | | | — | | | | (11 | ) |
| | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 339 | | | | 477 | | | | 152 | | | | (419 | ) | | | 549 | |
Provision for income taxes | | | — | | | | 168 | | | | 42 | | | | — | | | | 210 | |
| | | | | | | | | | | | | | | |
NET INCOME | | $ | 339 | | | $ | 309 | | | $ | 110 | | | $ | (419 | ) | | $ | 339 | |
| | | | | | | | | | | | | | | |
-21-
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended August 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | �� |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
CASH PROVIDED BY OPERATING ACTIVITIES | | $ | 123 | | | $ | 474 | | | $ | 68 | | | $ | — | | | $ | 665 | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (655 | ) | | | (44 | ) | | | — | | | | (699 | ) |
Proceeds from asset dispositions | | | — | | | | 1 | | | | 4 | | | | — | | | | 5 | |
| | | | | | | | | | | | | | | |
CASH USED IN INVESTING ACTIVITIES | | | — | | | | (654 | ) | | | (40 | ) | | | — | | | | (694 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Net transfers (to) from Parent | | | (245 | ) | | | 237 | | | | 8 | | | | — | | | | — | |
Proceeds from debt issuance | | | 999 | | | | — | | | | — | | | | — | | | | 999 | |
Principal payments on debt | | | (200 | ) | | | (21 | ) | | | — | | | | — | | | | (221 | ) |
Proceeds from stock issuances | | | 30 | | | | — | | | | — | | | | — | | | | 30 | |
Excess tax benefit on the exercise of stock options | | | 6 | | | | — | | | | — | | | | — | | | | 6 | |
Dividends paid | | | (28 | ) | | | — | | | | — | | | | — | | | | (28 | ) |
Other, net | | | (4 | ) | | | — | | | | — | | | | — | | | | (4 | ) |
| | | | | | | | | | | | | | | |
CASH PROVIDED BY FINANCING ACTIVITIES | | | 558 | | | | 216 | | | | 8 | | | | — | | | | 782 | |
| | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 681 | | | | 36 | | | | 36 | | | | — | | | | 753 | |
Cash and cash equivalents at beginning of period | | | 1,679 | | | | 114 | | | | 144 | | | | — | | | | 1,937 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 2,360 | | | $ | 150 | | | $ | 180 | | | $ | — | | | $ | 2,690 | |
| | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended August 31, 2005
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Guarantor | | | Non-guarantor | | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
CASH PROVIDED BY OPERATING ACTIVITIES | | $ | 241 | | | $ | 493 | | | $ | 49 | | | $ | — | | | $ | 783 | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (2 | ) | | | (619 | ) | | | (50 | ) | | | — | | | | (671 | ) |
Proceeds from asset dispositions | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | |
CASH USED IN INVESTING ACTIVITIES | | | (2 | ) | | | (618 | ) | | | (50 | ) | | | — | | | | (670 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Net transfers (to) from Parent | | | (183 | ) | | | 201 | | | | (18 | ) | | | — | | | | — | |
Principal payments on debt | | | — | | | | (95 | ) | | | — | | | | — | | | | (95 | ) |
Proceeds from stock issuances | | | 18 | | | | — | | | | — | | | | — | | | | 18 | |
Dividends paid | | | (24 | ) | | | — | | | | — | | | | — | | | | (24 | ) |
| | | | | | | | | | | | | | | |
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | (189 | ) | | | 106 | | | | (18 | ) | | | — | | | | (101 | ) |
| | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | 50 | | | | (19 | ) | | | (19 | ) | | | — | | | | 12 | |
Cash and cash equivalents at beginning of period | | | 742 | | | | 151 | | | | 146 | | | | — | | | | 1,039 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 792 | | | $ | 132 | | | $ | 127 | | | $ | — | | | $ | 1,051 | |
| | | | | | | | | | | | | | | |
-22-
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
FedEx CorporationWe have reviewed the condensed consolidated balance sheet of FedEx Corporation as of August 31,
2005,2006, and the related condensed consolidated statements of income and cash flows for the three-month periods ended August 31,
20052006 and
2004.2005. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31,
2005,2006, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated July
12, 2005,11, 2006 (except Note 22, as to which the date is August 2, 2006), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31,
2005,2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
| /s/ Ernst & Young LLP
|
Memphis, Tennesse
| |
September 20, 2005
| |
/s/ Ernst & Young LLP
Memphis, Tennessee
September 20, 2006
16-23-
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following Management’s Discussion and Analysis of Results of Operations and Financial Condition describes the principal factors affecting the results of operations, liquidity, capital resources,
and contractual cash obligations
as well as theand critical accounting
policies and estimates of FedEx. This discussion should be read in conjunction with the accompanying
quarterly unaudited condensed consolidated financial statements and our Annual Report
on Form 10-K for the year ended May 31,
2005 (“2006. Our Annual
Report”), which includeReport includes additional information about our significant accounting policies, practices and the transactions that underlie our financial
results.results, as well as our detailed discussion of the most significant risks and uncertainties to which our financial and operating results are subject.
FedEx provides a broad portfolio of transportation, e-commerce and business services through
companies operating
companies that competeindependently, competing collectively and
are managed collaboratively under the respected FedEx
brands.brand. These operating companies are primarily represented by FedEx Express, the world’s largest express transportation company; FedEx Ground, a leading provider of small-package ground delivery services; FedEx Freight, a leading U.S. provider of
regional LTLless than truckload (“LTL”) freight services; and FedEx Kinko’s, a leading provider of document solutions and business services. These companies form the core of our reportable segments. See “Reportable Segments” for further discussion.
The key indicators necessary to understand our operating results include:
·
the overall customer demand for our various services;
·
the volumes of transportation and business services provided through our networks, primarily measured by our average daily volume and shipment weight;
·
the mix of services purchased by our customers;
·
the prices we obtain for our services, primarily measured by average price per shipment (yield);
·
our ability to manage our cost structure for capital expenditures and operating expenses
such as salaries and employee benefits and maintenance and repairs and to match
such expensesour cost structure to shifting volume levels; and
·
the timing and amount of fluctuations in fuel prices and
the availability of adequateour ability to recover incremental fuel
supplies.costs through our fuel surcharges.
Except as otherwise specified, references to years indicate our fiscal year endedending May 31, 20062007 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments mean, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.
-24-
The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share amounts) for the three months ended August 31:
| | | | | | | | | | | | | |
| | | | | | Dollar | | Percent | | | Percent | |
| | 2005(1) | | 2004 | | Change | | Change | | | 2006 | | 2005(1) | | Change | |
Revenues | | $ | 7,707 | | $ | 6,975 | | | 732 | | | 10 | | | $ | 8,545 | | $ | 7,707 | | 11 | |
Operating income | | 584 | | 579 | | | 5 | | | 1 | | | 784 | | 584 | | 34 | |
Operating margin | | 7.6 | % | 8.3 | % | | NM | | | (72 bp | ) | | | 9.2 | % | | | 7.6 | % | | 160 | bp |
Net income | | $ | 339 | | $ | 330 | | | 9 | | | 3 | | | $ | 475 | | $ | 339 | | 40 | |
| | | | | | | | |
Diluted earnings per share | | $ | 1.10 | | $ | 1.08 | | | 0.02 | | | 2 | | | $ | 1.53 | | $ | 1.10 | | 39 | |
| | | | | | | | |
(1) First quarter 2006 operating expenses include a $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, predominately at FedEx Express, as described below.
17
| | |
(1) | | Operating expenses for the three months ended August 31, 2005 include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express, which reduced operating margin by 103 basis points. |
The following table shows changes in revenues and operating income by reportable segment for the three-month periodthree months ended August 31, 20052006 compared to 20042005 (in millions):
| | | | | | | | | | | | | | | | | |
| | Revenues | | Operating Income | | | Revenues | | Operating Income | |
| | Dollar | | Percent | | Dollar | | Percent | | | Dollar | | Percent | | Dollar | | Percent | |
| | Change | | Change | | Change | | Change | | | Change | | Change | | Change | | Change | |
FedEx Express segment(1) | | | 506 | | | | 11 | | | | (25 | ) | | | (8 | ) | | | $ | 518 | | 10 | | $ | 182 | | 64 | |
FedEx Ground segment | | | 146 | | | | 14 | | | | 1 | | | | 1 | | | | 198 | | 16 | | 9 | | 6 | |
FedEx Freight segment | | | 85 | | | | 11 | | | | 32 | | | | 31 | | | | 121 | | 14 | | 15 | | 11 | |
FedEx Kinko’s segment | | | 27 | | | | 6 | | | | (3 | ) | | | (16 | ) | | | | (13 | ) | | | (3 | ) | | | (6 | ) | | | (38 | ) |
Other and Eliminations | | | (32 | ) | | | NM | | | | — | | | | NM | | | | 14 | | NM | | — | | NM | |
| | | 732 | | | | 10 | | | | 5 | | | | 1 | | | | | | | |
| | | $ | 838 | | 11 | | $ | 200 | | 34 | |
| | | | | | |
| | |
(1) | | FedEx Express operating expenses for the three months ended August 31, 2005 include a $75 million charge to adjust the accounting for certain facility leases. |
(1) First quarter 2006 operating expenses for FedEx Express include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, as described below.-25-
The following table shows selected operating statistics (in thousands, except yield amounts) for the three-month periodsthree months ended August 31, 2005 and 2004:31:
| | | | | | | | | | | | | |
| | | | | | Percent | | | Percent | |
| | 2005 | | 2004 | | Change | | | 2006 | | 2005 | | Change | |
Average daily package volume (ADV): | | | | | | | | | | |
FedEx Express | | 3,233 | | 3,093 | | | 5 | | | | 3,194 | | 3,233 | | | (1 | ) |
FedEx Ground | | 2,586 | | 2,447 | | | 6 | | | | 2,926 | | 2,586 | | 13 | |
| | | | | | |
Total ADV | | 5,819 | | 5,540 | | | 5 | | | | 6,120 | | 5,819 | | 5 | |
| | | | | | |
Average daily LTL shipments: | | | | | | | | | | |
FedEx Freight | | 65 | | 64 | | | 2 | | | | 70 | | 65 | | 8 | |
Revenue per package (yield): | | | | | | | | | | |
FedEx Express | | $ | 20.80 | | $ | 19.78 | | | 5 | | | | $ | 23.04 | | $ | 20.80 | | 11 | |
FedEx Ground | | 6.92 | | 6.54 | | | 6 | | | | 7.13 | | 6.92 | | 3 | |
LTL yield (revenue per hundredweight): | | | | | | | | | | |
FedEx Freight | | $ | 16.55 | | $ | 14.98 | | | 10 | | | | $ | 17.90 | | $ | 16.55 | | 8 | |
Revenue growth for the first quarter of
20062007 was
primarily attributable to
volume and yield
improvementsimprovement across all
of our transportation segments,
and increased revenuevolume growth at FedEx
Kinko’s.Ground and FedEx Freight and package volume growth in our International Priority (“IP”) services at FedEx Express. Yield improvements
in our transportation businesses were
primarilyprincipally due to
significantly higher fuel surcharges
duringand rate increases. Volume increases at FedEx Ground resulted from increases in both commercial business and FedEx Home Delivery service, which helped mitigate the
impact of domestic volume declines at FedEx Express. Shipment volumes grew 8% at FedEx Freight in the first quarter of 2007, while IP package volumes at FedEx Express grew 6% for the quarter.
Operating income increased Revenues at FedEx Kinko’s decreased during the first quarter of 20062007 primarily due to a continued competitive environment for copy services.
Operating income increased in the first quarter of 2007 primarily due to revenue growth in all transportation segments and improved margins at FedEx Freight. Although our fuel costsExpress and was slightly offset by reduced operating income at FedEx Kinko’s. Effective cost controls and revenue management actions contributed to increased significantly duringoperating margin at FedEx Express in the first quarter of 2006, higher revenues from our jet and diesel fuel surcharges more than offset these higher fuel costs. Increased purchased transportation costs2007. FedEx Express operating income in the first quarter of 2006 included a $75 million charge described below.
While fuel costs increased approximately 30% during the first quarter of 2007, fuel surcharges were primarily driven bysufficient to mitigate the effect of higher fuel costs at FedEx Expresson our operating results based on a static analysis of the year-over-year changes in fuel prices compared to support IP volume growth requirementschanges in fuel surcharges. Though fluctuations in fuel surcharge rates can be significant from period to period, fuel surcharges represent one of the many individual components of our pricing structure that impact our overall revenue and proportionately higher costs at FedEx Ground dueyield. Additional components include the mix of services purchased, the base price and other extra service charges we obtain for these services and the level of pricing discounts offered. In order to provide information about the impact of rising fuel costssurcharges on contractor settlements, as well as the inclusiontrend in revenue and yield growth, we have included the comparative fuel surcharge rates in effect for the first quarter of 2007 and 2006 in the following discussions of each of our transportation segments.
Our results
of FedEx SmartPost, which was acquired in September 2004.Duringfor the first quarter of 2006 included a one time, non-cashnoncash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) was recorded,share), which represented the impact on prior years to adjust the accounting for certain facility leases, predominatelypredominantly at FedEx Express. The charge related primarily to rent escalations in on-airport facility leases. The applicable accounting literature provides that rent expense under operating leases with rent escalation clauses should be
18
recognized evenly, on a straight-line basis over the lease term. Based on a more extensive review of our leases during the first quarter, we determined that a portion of our facility leases had rent escalation clauses that were not being recognized appropriately. Because the amounts involved were not material to our financial statements in any individual prior period and the cumulative amount is not expected to be material to 2006 results, we have recorded the cumulative adjustment in the first quarter, which increased operating expenses by $79 million.
In August 2005, Hurricane Katrina devastated certain portions of the Gulf Coast region where each of our business segments has operations. While we took precautions by relocating aircraft and equipment, we suffered damage to a limited number of facilities and some of our equipment. Because only three business days in the quarter were affected by the storm, our results of operations for the first quarter were not significantly impacted.
Net interest expense decreased $15 million during the first quarter of 2006. The decrease in net interest expense was2007 primarily due to a reduction in the level of outstandingscheduled debt and capital leases as a result of scheduled payments additional capitalized interest and increased interest income.income from higher cash balances and an increase in interest rates.
-26-
Our effective tax rate was
38.25%38.3% for
both the first quarter of
both 20062007 and
2005.2006. We expect the effective tax rate to
approximate 38%be 38.0% to 38.5% for the remainder of
the fiscal year; however, the2007. The actual rate will depend on a number of factors, including the amount and source of operating income.
OutlookBusiness AcquisitionsWhile comparisons
On September 3, 2006, we acquired the LTL operations of Watkins Motor Lines (“Watkins”), a privately held company, and certain affiliates for approximately $780 million in cash. Watkins is a leading provider of long-haul LTL services. Watkins is being rebranded as FedEx National LTL and will continuebe included in the FedEx Freight segment commencing in the second quarter of 2007.
In January 2006, FedEx Express entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire DTW Group’s 50% share of the FedEx-DTW International Priority express joint venture (“FedEx-DTW”) and DTW Group’s domestic express network in China for approximately $400 million in cash. This acquisition will convert our joint venture with DTW Group, formed in 1999 and currently accounted for under the equity method, into a wholly-owned subsidiary and increase our presence in China in the international and domestic express businesses. The acquisition is expected to be difficult against a verycompleted during 2007, subject to customary closing conditions. The financial results of this transaction will be included in the FedEx Express segment from the date of acquisition.
Outlook
While our growth rate is expected to moderate in comparison to our strong 2005,growth in 2006, we expect ongoing revenue and earnings growthimprovement across all FedEx operating companiestransportation segments in 2006.2007. Our view stems from expectations of strong customer demand foroutlook is based on solid global economic growth, with the U.S. economy growing at a moderate, sustainable rate. We anticipate revenue growth in our high-margin services, across our operating companiesproductivity improvements and continued albeit slower,focus on yield management.
We anticipate growth in total U.S. domestic package volumes and yields, as well as continued growth in FedEx Express IP shipments and yields. We also anticipate year-over-year increases in volumes and yields at FedEx Freight as that segment continues to expand its LTL network and service offerings.
FedEx Kinko’s will focus on key strategies related to adding new locations, improving customer service and increasing investments in employee development and training, which we expect to result in decreased profitability in the worldwide economy.short-term. In the first quarter of 2007, FedEx Kinko’s announced the model for new centers, which will be approximately one-third the size of a traditional center and will include enhanced pack-and-ship stations and a doubling of the number of office products offered. FedEx Kinko’s plans to open approximately 200 new centers across the United States during 2007, which will bring the total number of domestic centers to over 1,500.
We expect to continue to make investments to expand our networks and broaden our service offerings, in part through the integration and expansion of FedEx National LTL and our investments overseas. We anticipate that our new FedEx National LTL business will extend our leadership position in the heavy freight sector and provide new growth opportunities for our LTL operations in 2007 and beyond.
On September 25, 2006, we announced a $2.6 billion multi-year program to acquire and modify approximately 90 Boeing 757-200 aircraft to replace our narrow body fleet of Boeing 727-200 aircraft. We expect to bring the new aircraft into service during the eight-year period between calendar years 2008 and 2016 contingent upon identification and purchase of suitable 757 aircraft. The impact to 2007 of this program has been reflected in our expected 2007 capital expenditures of approximately $3 billion.
All of our transportation businesses operate in a competitive pricing environment, exacerbated by continuing high fuel prices. While our fuel surcharges have been sufficient to offset increased fuel prices, we cannot predict the impact on the overall economy
(if any) if fuel costs
remain atsignificantly fluctuate from current
levels or continue to increase.We expect near term effects from Hurricane Katrina may impact second quarter earnings. For example, shipping services to and from the region (outside of relief efforts) and business services within the region will be impacted for at least the near term. We also provided cash contributions and shipping services to the American Red Cross and other agencies to aid in the relief effort, and we expect to make further contributions. While we maintain business interruption and other insurance, we cannot currently assess the amounts or timing of any recoverable losses associated with Hurricane Katrina.
We expect continued strong growth of international volumes and yields and modest growth in U.S. domestic revenue at FedEx Express. We anticipate improved volumes and yields at FedEx Ground and FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional business and enhance its portfolio of services. FedEx Kinko’s is expected to generate revenue growth from the transition of FedEx World Service Centers to FedEx Kinko’s Ship Centers and expansion of its retail network.
levels. Volatility in fuel costs may pressurealso impact quarterly earnings growth asbecause adjustments to our fuel
-27-
surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to
the FedEx Express
and FedEx Ground fuel
surchargesurcharges can significantly affect earnings in the
short term. Incremental costs associated with the new westbound and eastbound around-the-world flights at FedEx Express will be significant in 2006, and a competitive pricing environment, heightened by continuing high fuel prices, may limit base U.S. domestic yield growth, particularly in our package businesses.short-term.
The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. In accordanceAugust 2006, FedEx Express and the pilots’ union reached a tentative agreement on a new labor contract. The proposed new contract includes signing bonuses and other compensation that would result in a charge in the period of ratification of approximately $145 million. Contract ratification is expected during the second quarter of 2007 but cannot be assured. If ratified, the new four-year contract will become amendable in 2010.
In July 2006, FedEx Express entered into a new seven-year transportation agreement with
applicable labor law, wethe United States Postal Service (“USPS”) under which FedEx Express will continue to
operate under our currentprovide domestic air transportation services to the USPS, including for its First Class, Priority and Express Mail. The agreement
while we negotiate with our pilots. Contract negotiations withis expected to generate more than $8 billion in revenue for FedEx Express over its term, which begins on September 25, 2006, and ends on September 30, 2013. The agreement will replace the
pilots’ union began in March 2004. These19
negotiations are ongoing and have recently included private facilitation sessions in an effort to make progress. We cannot estimate the financial impact, if any, the results of these negotiations may have on our future results of operations.
Increased security requirements for air cargo carriers have not had a material impact on our operating results for the periods presented. In November 2004, the Transportation Security Administration (“TSA”) proposed new rules enhancing many of the security requirements for air cargo on both passenger and all-cargo aircraft. Because the TSA’s proposed rules are subject to comment, any final rules may differ significantly from the proposed rules. Accordingly, it is not yet possible to estimate the impact, if any, that the adoption of new rules by the TSA or any other additional security requirements may have on our results of operations. However, it is possible that increased security requirements could impose substantial incremental costs on us and our competitors.
Future results will depend upon a number of factors, including U.S. and international economic conditions, the effect of Hurricane Katrina or other severe weather events on our operationsexisting seven-year transportation agreement between FedEx Express and the economy, including the impact on fuel costs and availability, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels, our ability to effectively leverage our new service and growth initiatives and our ability to successfully conclude contract negotiations with our pilots and defend against challenges to our independent contractor model described in Note 8 to the accompanying unaudited condensed consolidated financial statements. In addition, adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, our operating income could be materially affected should the price of fuel continue to fluctuate by significant amounts. USPS.
See “Forward-Looking Statements” for a
more complete discussion of potential risks and uncertainties that could materially affect our future performance.
NEW ACCOUNTING PRONOUNCEMENTSIn December 2004,
On June 1, 2006 we adopted the
provisions of Statement of Financial Accounting Standards
Board (“
FASB”SFAS”)
issued SFAS 123R, “Share-Based
Payment.Payment,”
SFAS 123R is a revisionwhich requires recognition of
SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value
method. We adopted SFAS 123R using the modified prospective method,
and is effectivewhich resulted in prospective recognition of compensation expense for
annual periods beginning after June 15, 2005 (effective inall outstanding unvested share-based payments to employees based on the fair value on the original grant date. Under this method of adoption, our financial statement amounts for the prior period presented have not been restated. The adoption of SFAS 123R reduced earnings for the first quarter of 2007
for FedEx). Compensation expense will be recorded overby $0.05 per diluted share. For additional information on the
requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.The impact of the adoption of SFAS 123R, cannot be predicted at this time because it will depend on levels of share-based payments grantedrefer to Note 2 in the future, as well as the assumptions and the fair value model used to value them, and the market value of our common stock. We anticipate that the impact of SFAS 123R will approximate the pro forma results under SFAS 123 presented in Note 1 to the accompanying unaudited condensed consolidated financial statements.
The
effect of recording compensation expense under SFAS 123 for the periods ended August 31, 2005 and 2004 would have resulted in a reduction to earnings per diluted share of $0.04 and $0.03, respectively. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. Based on historical experience, we do not expect the impact of adopting SFAS 123R to be material to our reported consolidated cash flows.In March 2005, the FASB issued Financial Accounting Standards BoardFASB Interpretation No. (“FIN”) 47,48, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to
20
reasonably estimate the fair value of the liability. FIN 47Uncertainty in Income Taxes,” in July 2006. The new rules will be effective for FedEx no later than May 31, 2006. Management is in the process of2008. We are evaluating the impact, if any, FIN 47this interpretation, but do not presently anticipate its adoption will have a material impact on FedEx.
our financial statements.
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s form the core of our reportable segments. OurAs of August 31, 2006, our reportable segments includeincluded the following businesses:
| | |
FedEx Express Segment | | FedEx Express (express transportation) |
| FedEx Trade Networks (global trade services)
|
FedEx Ground Segment | | FedEx Ground (small-package ground delivery) |
| FedEx SmartPost (small-parcel consolidator)
|
| FedEx Supply Chain Services (contract logistics)
|
FedEx Freight Segment | | FedEx Freight (LTL(regional LTL freight transportation) |
| FedEx Custom Critical (time-critical transportation)
|
| Caribbean Transportation Services (airfreight forwarding)
|
FedEx Kinko’s Segment | | FedEx Kinko’s (document solutions and business services) |
-28-
FedEx Services provides customer-facing sales, marketing and information technology support, primarily for FedEx Express and FedEx Ground. The costs for these activities are allocated based on metrics such as relative revenues or estimated services provided. We believe these allocations approximate the cost of providing these functions.
The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our reportable segments includes the allocations from FedEx Services to
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s.the respective segments. The “Intercompany charges” caption also includes allocations for
administrative services provided between operating companies and certain other costs such as corporate management fees related to services received for general corporate oversight, including executive officers and certain legal and finance functions. Management evaluates segment financial performance based on operating income.
Effective June 1, 2006, we moved the credit, collections and customer service functions with responsibility for FedEx Express and FedEx Ground customer information from FedEx Express into a new subsidiary of FedEx Services named FedEx Customer Information Services, Inc. (“FCIS”). Also, effective June 1, 2006, we moved FedEx Supply Chain Services, Inc., the results of which were previously reported in the FedEx Ground segment, into a new subsidiary of FedEx Services named FedEx Global Supply Chain Services, Inc. The costs of providing these customer service functions and the net operating costs of FedEx Global Supply Chain Services are allocated back to the FedEx Express and FedEx Ground segments. Prior year amounts have not been reclassified to conform to the current year segment presentation as the financial results are materially comparable.
In addition, certain FedEx operating companies provide transportation and related services for other FedEx companies outside their reportable segment. Billings for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. The FedEx Kinko’s segment revenues include package acceptance revenue, which represents the fee received by FedEx Kinko’s from FedEx Express and FedEx Ground for accepting and handling packages at FedEx Kinko’s locations on behalf of these operating companies. Package acceptance revenue does not include the external revenue associated with the actual shipments. ShipmentAll shipment revenues are reflected in the segment performing the transportation services. Such intersegment revenues and expenses are eliminated in the consolidated results but are not separately identified in the following segment information as the amounts are not material and are eliminated in the consolidated results.material.
21-29-
The following table compares revenues, operating expenses, operating income and operating margin (dollars in millions) for the three-month periods ended August 31:
| | | | | | | | | | | | | |
| | | | | | Percent | | | Percent | |
| | 2005 | | 2004 | | Change | | | 2006 | | 2005 | | Change | |
Revenues: | | | | | | | | | | |
Package: | | | | | | | | | | |
U.S. overnight box | | $ | 1,560 | | $ | 1,449 | | | 8 | | | | $ | 1,654 | | $ | 1,560 | | 6 | |
U.S. overnight envelope | | 489 | | 439 | | | 11 | | | | 511 | | 489 | | 4 | |
U.S. deferred | | 687 | | 648 | | | 6 | | | | 705 | | 687 | | 3 | |
| | | | | | |
Total U.S. domestic package revenue | | 2,736 | | 2,536 | | | 8 | | | | 2,870 | | 2,736 | | 5 | |
International Priority (IP) | | 1,634 | | 1,440 | | | 13 | | | | 1,914 | | 1,634 | | 17 | |
| | | | | | |
Total package revenue | | 4,370 | | 3,976 | | | 10 | | | | 4,784 | | 4,370 | | 9 | |
Freight: | | | | | | | | | | |
U.S. | | 505 | | 421 | | | 20 | | | | 607 | | 505 | | 20 | |
International | | 105 | | 90 | | | 17 | | | | 104 | | 105 | | | (1 | ) |
| | | | | | |
Total freight revenue | | 610 | | 511 | | | 19 | | | | 711 | | 610 | | 17 | |
Other(1) | | 142 | | 129 | | | 10 | | | | 145 | | 142 | | 2 | |
| | | | | | |
Total revenues | | 5,122 | | 4,616 | | | 11 | | | | 5,640 | | 5,122 | | 10 | |
Operating expenses: | | | | | | | | | | |
Salaries and employee benefits | | 1,971 | | 1,889 | | | 4 | | | | 2,002 | | 1,971 | | 2 | |
Purchased transportation | | 241 | | 191 | | | 26 | | | | 263 | | 241 | | 9 | |
Rentals and landing fees | | 483 | | 383 | | | 26 | | | | 398 | | 483 | | | (18 | ) |
Depreciation and amortization | | 193 | | 200 | | | (4 | ) | | | 205 | | 193 | | 6 | |
Fuel | | 628 | | 422 | | | 49 | | | | 798 | | 628 | | 27 | |
Maintenance and repairs | | 361 | | 325 | | | 11 | | | | 398 | | 361 | | 10 | |
Intercompany charges | | 358 | | 362 | | | (1 | ) | | | 510 | | 358 | | 42 | |
Other | | 602 | | 534 | | | 13 | | | | 599 | | 602 | | — | |
| | | | | | |
Total operating expenses(2) | | 4,837 | | 4,306 | | | 12 | | | | 5,173 | | 4,837 | | 7 | |
| | | | | | |
Operating income | | $ | 285 | | $ | 310 | | | (8 | ) | | | $ | 467 | | $ | 285 | | 64 | |
| | | | | | |
Operating margin | | 5.6 | % | 6.7 | % | | | | | | | 8.3 | % | | | 5.6 | % | | 270 | bp |
| | |
(1) | | Other revenues includes FedEx Trade Networks. |
|
(2) | | Operating expenses for the three months ended August 31, 2005 include a $75 million charge, primarily recorded in rentals and landing fees, to adjust the accounting for certain facility leases, which reduced operating margin by 146 basis points. |
(1)Other revenues includes FedEx Trade Networks.-30-
(2)First quarter 2006 operating expenses include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.
22
The following table compares selected statistics (in thousands, except yield amounts) for the three-month periods ended August 31:
| | | | | | | | | | | | | |
| | | | | | Percent | | | Percent | |
| | 2005 | | 2004 | | Change | | | 2006 | | 2005 | | Change | |
Package Statistics(1) | | | | | | | | | | |
Average daily package volume (ADV): | | | | | | | | | | |
U.S. overnight box | | 1,180 | | 1,150 | | | 3 | | | | 1,166 | | 1,180 | | | (1 | ) |
U.S. overnight envelope | | 711 | | 662 | | | 7 | | | | 703 | | 711 | | | (1 | ) |
U.S. deferred | | 897 | | 862 | | | 4 | | | | 855 | | 897 | | | (5 | ) |
| | | | | | |
Total U.S. domestic ADV | | 2,788 | | 2,674 | | | 4 | | | | 2,724 | | 2,788 | | | (2 | ) |
IP | | 445 | | 419 | | | 6 | | | | 470 | | 445 | | 6 | |
| | | | | | |
Total ADV | | 3,233 | | 3,093 | | | 5 | | | | 3,194 | | 3,233 | | | (1 | ) |
| | | | | | |
Revenue per package (yield): | | | | | | | | | | |
U.S. overnight box | | $ 20.34 | | $ 19.37 | | | 5 | | | | $ | 21.83 | | $ | 20.34 | | 7 | |
U.S. overnight envelope | | 10.57 | | 10.21 | | | 4 | | | | 11.19 | | 10.57 | | 6 | |
U.S. deferred | | 11.78 | | 11.57 | | | 2 | | | | 12.69 | | 11.78 | | 8 | |
U.S. domestic composite | | 15.10 | | 14.59 | | | 3 | | | | 16.21 | | 15.10 | | 7 | |
IP | | 56.54 | | 52.93 | | | 7 | | | | 62.58 | | 56.54 | | 11 | |
Composite package yield | | 20.80 | | 19.78 | | | 5 | | | | 23.04 | | 20.80 | | 11 | |
Freight Statistics(1) | | | | | | | | | | |
Average daily freight pounds: | | | | | | | | | | |
U.S. | | 8,885 | | 8,213 | | | 8 | | | | 9,374 | | 8,885 | | 6 | |
International | | 2,039 | | 1,861 | | | 10 | | | | 1,899 | | 2,039 | | | (7 | ) |
| | | | | | |
Total average daily freight pounds | | 10,924 | | 10,074 | | | 8 | | | | 11,273 | | 10,924 | | 3 | |
| | | | | | |
Revenue per pound (yield): | | | | | | | | | | |
U.S. | | $ 0.88 | | $ 0.79 | | | 11 | | | | $ | 1.00 | | $ | 0.88 | | 14 | |
International | | 0.79 | | 0.74 | | | 7 | | | | 0.84 | | 0.79 | | 6 | |
Composite freight yield | | 0.86 | | 0.78 | | | 10 | | | | 0.97 | | 0.86 | | 13 | |
(1) Package and freight statistics include only the operations of FedEx Express.
| | |
(1) | | Package and freight statistics include only the operations of FedEx Express. |
FedEx Express Segment Revenues FedEx Express segment total revenues increased 11% in the first quarter of 2006,2007, principally due to higher IP revenues (particularly in U.S. outbound, Asia and U.S. outbound)Europe) and higher U.S. domestic package and freight revenues. During the first quarter of 2007, IP revenues grew 13%17% on yield growth of 7%11% and a 6% increase in volume. Outbound shipments fromU.S. domestic package revenues grew 5% in the United Statesfirst quarter of 2007 due to a yield increase of 7%, partially offset by a 2% decrease in volume. Freight revenues grew in the first quarter based principally on stronger domestic yield and volumes.
IP yield increased during the first quarter of 2007 primarily due to higher fuel surcharges, increases in international average weight per package, higher rate per pound and favorable exchange rate impacts. U.S. domestic composite yield increases were due to higher fuel surcharges and an increase in the average rate per pound. We continue to manage our U.S. domestic revenue to improve the profitability of these services. U.S. freight yield increased due to higher fuel surcharges and an increase in the average rate per pound.
Asia experienced solid average daily volume growth during the first quarter of
2006,2007, while
Asiaoutbound shipments from the United States and Europe
continued to improve.also increased. IP
yieldand international freight capacity has increased
during the first quartersignificantly as a result of
2006 dueour two around-the-world flights which we added in late 2005 and early 2006. This additional capacity resulted in higher IP volume. U.S. volumes decreased primarily
to higher fuel surcharge revenue, an increase in international average weight per package and favorable exchange rate differences.U.S. domestic composite yield increased 3% during the first quarter of 2006 due to higher fuel surcharge revenue and an increase in average rate per pound, partially offset by a decrease in average weight per package. U.S. domestic volumes at FedEx Expressmanagement actions that began last year.
-31-
Fuel surcharges increased
4% in the first quarter of
2006, continuing the momentum of improved quarterly growth from the second half of 2005. Freight revenue increased during 2006 due to higher yields and growth in freight volumes. As capacity is added to our international network, we may continue to realize higher international freight volume until higher yielding IP shipment traffic grows into the added capacity. In January 2005, we implemented an average list price23
increase of 4.6% on FedEx Express U.S. domestic shipments and U.S. outbound international shipments, while we lowered our fuel surcharge index by 200 basis points.
Fuel surcharge revenue was higher in the first quarter of 20062007 due to higher jet fuel prices. Our fuel surcharge is indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge and the international fuel surcharges ranged as follows for the three-monththree month periods ended August 31:
| | | | | | | | | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
U.S. Domestic and Outbound Fuel Surcharge: | | | | | | |
Low | | 10.50 | % | 6.00 | % | | | 16.00 | % | | | 10.50 | % |
High | | 12.50 | | 7.50 | | | 16.00 | | 12.50 | |
Average | | 11.50 | | 6.83 | | |
Weighted-average | | | 16.00 | | 11.48 | |
International Fuel Surcharges: | | | | | | |
Low | | 10.00 | | 5.00 | | | 12.50 | | 10.00 | |
High | | 12.50 | | 7.50 | | | 16.00 | | 12.50 | |
Average | | 11.13 | | 6.37 | | |
Weighted-average | | | 14.63 | | 10.93 | |
FedEx Express Segment Operating Income During the first quarter of 2007, our operating income grew as a result of revenue growth and improved operating margin. Continued volume growth in IP services contributed to solid yield improvements. Operating
income at the FedEx Express segment decreased by $25 millionmargin improvement during the first quarter of
2006. The2007 was primarily due to higher yields, combined with cost containment and the inclusion in the first quarter of 2006
includedof a
one-time, non-cash$75 million charge to adjust the accounting for certain facility
leases of $75 million (before variable compensation effects), as well as increases in salaries and employee benefits and purchased transportation costs.Duringleases.
Fuel costs were higher during the first quarter of 2006, fuel costs were higher2007 due to a 42%an increase in the average price per gallon of jet fuel, while gallons consumed increased slightly. However, fuel surcharge revenuesurcharges substantially offsetmitigated the impact of higher jet fuel prices. Purchased transportation costs increased in the first quarter of 2006, led by IP volume growth which required a higher utilization of contract pickup and delivery services. The increase in the first quarter of 2006decrease in rentals and landing fees is primarily dueattributable to the one-time adjustment for leases in 2006 described above. Intercompany charges increased primarily due to allocations as a result of moving the FCIS organization from FedEx Express to FedEx Services in 2007. The costs associated with the FCIS organization in 2006 were of a comparable amount but were reported in individual operating expense captions. Prior year amounts have not been reclassified to conform to the current year presentation as financial results are materially comparable.
24-32-
The following table compares revenues, operating expenses, operating income and operating margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three-monththree month periods ended August 31:
| | | | | | | | | | | | | |
| | | | | | Percent | | | Percent | |
| | 2005 | | 2004 | | Change | | | 2006 | | 2005 | | Change | |
Revenues | | $ | 1,219 | | $ | 1,073 | | | 14 | | | | $ | 1,417 | | $ | 1,219 | | 16 | |
Operating expenses: | | | | | | | | | | |
Salaries and employee benefits | | 221 | | 197 | | | 12 | | | | 241 | | 221 | | 9 | |
Purchased transportation | | 466 | | 410 | | | 14 | | | | 553 | | 466 | | 19 | |
Rentals | | 31 | | 26 | | | 19 | | | | 36 | | 31 | | 16 | |
Depreciation and amortization | | 50 | | 40 | | | 25 | | | | 61 | | 50 | | 22 | |
Fuel | | 18 | | 7 | | | 157 | | | | 31 | | 18 | | 72 | |
Maintenance and repairs | | 29 | | 26 | | | 12 | | | | 31 | | 29 | | 7 | |
Intercompany charges | | 120 | | 115 | | | 4 | | | | 136 | | 120 | | 13 | |
Other | | 136 | | 105 | | | 30 | | | | 171 | | 136 | | 26 | |
| | | | | | |
Total operating expenses | | 1,071 | | 926 | | | 16 | | | | 1,260 | | 1,071 | | 18 | |
| | | | | | |
Operating income | | $ | 148 | | $ | 147 | | | 1 | | | | $ | 157 | | $ | 148 | | 6 | |
| | | | | | |
Operating margin | | 12.1 | % | 13.7 | % | | | | | | | 11.1 | % | | | 12.1 | % | | (100 | ) | bp |
Average daily package volume(1) | | 2,586 | | 2,447 | | | 6 | | | | 2,926 | | 2,586 | | 13 | |
Revenue per package (yield)(1) | | $ | 6.92 | | $ | 6.54 | | | 6 | | | | $ | 7.13 | | $ | 6.92 | | 3 | |
(1) Package statistics include only the operations of FedEx Ground.
| | |
(1) | | Package statistics include only the operations of FedEx Ground. |
FedEx Ground Segment Revenues Revenues increased during the first quarter of
20062007 principally due to
solid volume and yield
growth and the inclusion of the operations for FedEx SmartPost, which was acquired on September 12, 2004.growth. Average daily volumes
at FedEx Ground rose 13%, due to increased
across virtually all of our servicescommercial business and
were primarily attributable to the continued growth of our
home deliveryFedEx Home Delivery service.
Yield increasedimprovement during the first quarter of 20062007 was primarily due to the impact of the general rate increase, increased fuel surcharges and higher extra service revenue the fuel surcharge(primarily on our residential and the January 2005 general ratesignature services). This increase was partially offset by higher customer discounts and a lower average weight and zone per package. Gains in extra service revenue are attributable to the reinstatement of the
The FedEx Ground fuel surcharge
and increases in residential and commercial delivery surcharges. In January 2005, we implemented an average list price increase of 2.9% and reintroduced an indexed fuel surcharge for all shipments, effective January 3, 2005. No fuel surcharge was in effect during the prior year period.Our fuel surcharge ranged as follows for the three-month period ended August 31:
|
| 2005
|
|
Low
| | 2.50
| %
|
High
| | 2.75
| |
Average
| | 2.67
| |
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 1% during the first quarter of 2006 as yield and volume growth offset higher operating expenses. Purchased transportation increased in the first quarter of
25
2006 primarily due to the impact of higher fuel costs on contractor settlements and the inclusion of operating costs related to FedEx SmartPost. Salaries and employee benefits, as well as other operating costs, increased in 2006 principally due to increases in staffing and facilities to support volume growth. Despite improved field productivity and aggressive cost control, the segment operating margin declined due to FedEx SmartPost and higher year-over-year expenses related to investment in new technology, as well as the opening of three new hubs in line with our long-term growth strategy.
FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, operating income and margin (dollars in millions) and selected statistics for the three-month periods ended August 31:
| | | | | | Percent | |
| | 2005 | | 2004 | | Change | |
Revenues | | $ | 892 | | $ | 807 | | | 11 | | |
Operating expenses: | | | | | | | | | |
Salaries and employee benefits | | 439 | | 410 | | | 7 | | |
Purchased transportation | | 72 | | 84 | | | (14 | ) | |
Rentals and landing fees | | 24 | | 25 | | | (4 | ) | |
Depreciation and amortization | | 30 | | 24 | | | 25 | | |
Fuel | | 82 | | 54 | | | 52 | | |
Maintenance and repairs | | 28 | | 31 | | | (10 | ) | |
Intercompany charges | | 9 | | 6 | | | 50 | | |
Other | | 73 | | 70 | | | 4 | | |
Total operating expenses | | 757 | | 704 | | | 8 | | |
Operating income | | $ | 135 | | $ | 103 | | | 31 | | |
Operating margin | | 15.1 | % | 12.8 | % | | | | |
Average daily LTL shipments (in thousands) | | 65 | | 64 | | | 2 | | |
Weight per LTL shipment (lbs) | | 1,132 | | 1,128 | | | — | | |
LTL yield (revenue per hundredweight) | | $ | 16.55 | | $ | 14.98 | | | 10 | | |
Certain prior period amounts have been reclassified to conform to the current period presentation.
26
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 11% during the first quarter of 2006 due to year-over-year growth in LTL yield and average daily LTL shipments. LTL yield grew during the first quarter of 2006, reflecting incremental fuel surcharges, higher rates and growth in our interregional freight service. The LTL fuel surcharge, which applies to the majority of our revenue, is based on a rounded average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. UsingOur fuel surcharge ranged as follows for the three month periods ended August 31:
| | | | | | | | |
| | 2006 | | | 2005 | |
Low | | | 4.25 | % | | | 2.50 | % |
High | | | 4.75 | | | | 2.75 | |
Weighted-average | | | 4.58 | | | | 2.67 | |
FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 6% during the first quarter of 2007, resulting principally from revenue growth and yield improvement. Salaries and employee benefits, as well as other operating costs, increased in the first quarter of 2007 largely due to increases in staffing and facilities to support volume growth. Depreciation expense in the first quarter of 2007 increased due to higher spending on material handling and scanning equipment and facilities associated with our multi-year capacity expansion. In the first quarter of 2007, purchased transportation increased 19% due to higher
-33-
fuel surcharges from third-party transportation providers, including our independent contractors. Increased fuel costs in the first quarter of 2007 were mostly offset by fuel surcharges. Other operating expenses increased 26% primarily due to increased legal costs, including settlements and reserves, which also negatively impacted operating margin.
Effective June 1, 2006, we moved FedEx Supply Chain Services, Inc., the results of which were previously reported in the FedEx Ground segment, into a new subsidiary of FedEx Services named FedEx Global Supply Chain Services, Inc. The net operating costs of this index,entity are allocated to FedEx Express and FedEx Ground. Prior year amounts have not been reclassified to conform to the approximatecurrent year segment presentation as financial results are materially comparable.
FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, operating income and operating margin (dollars in millions) and selected statistics for the three month periods ended August 31:
| | | | | | | | | | | | |
| | | | | | | | | | Percent | |
| | 2006 | | | 2005 | | | Change | |
Revenues | | $ | 1,013 | | | $ | 892 | | | | 14 | |
Operating expenses: | | | | | | | | | | | | |
Salaries and employee benefits | | | 484 | | | | 439 | | | | 10 | |
Purchased transportation | | | 83 | | | | 72 | | | | 15 | |
Rentals and landing fees | | | 23 | | | | 24 | | | | (4 | ) |
Depreciation and amortization | | | 31 | | | | 30 | | | | 3 | |
Fuel | | | 112 | | | | 82 | | | | 37 | |
Maintenance and repairs | | | 32 | | | | 28 | | | | 14 | |
Intercompany charges | | | 14 | | | | 9 | | | | 56 | |
Other | | | 84 | | | | 73 | | | | 15 | |
| | | | | | | | | | |
Total operating expenses | | | 863 | | | | 757 | | | | 14 | |
| | | | | | | | | | |
Operating income | | $ | 150 | | | $ | 135 | | | | 11 | |
| | | | | | | | | | |
Operating margin | | | 14.8 | % | | | 15.1 | % | | | (30 | ) | bp |
Average daily LTL shipments (in thousands) | | | 70 | | | | 65 | | | | 8 | |
Weight per LTL shipment (lbs) | | | 1,130 | | | | 1,132 | | | | — | |
LTL yield (revenue per hundredweight) | | $ | 17.90 | | | $ | 16.55 | | | | 8 | |
FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 14% during the first quarter due to growth in LTL yield and average daily shipments. LTL yield grew during the first quarter of 2007, reflecting incremental fuel surcharges resulting from higher fuel prices and higher rates. Increased customer demand for our regional and interregional LTL services contributed to the increase in average daily LTL shipments.
The indexed LTL fuel surcharge is based on the average of the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. The indexed LTL fuel surcharge ranged as follows for the three-month periods ended August 31:
| | | | | | | | | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
Low | | 12.5 | % | | 7.6 | % | | | | 19.5 | % | | | 12.5 | % |
High | | 16.8 | | | 9.6 | | | | 21.2 | | 16.8 | |
Average | | 14.6 | | | 8.4 | | | |
Weighted-average | | | 20.4 | | 14.5 | |
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FedEx Freight Segment Operating Income FedEx Freight segment operating income increased
31%11% during the first quarter of
20062007 primarily due to LTL revenue
growth and controlling costsgrowth. Operating margin declined slightly in
line with volume growth. Increased LTL yield contributedthe first quarter of 2007 due to the
improved margin in spiteimpact of higher
salariespurchased transportation and other operating costs. Salaries and employee benefits
costs, higher fuel and depreciation and amortization. Salaries and employee benefitsincreased in the first quarter of 2007 from increased staffing to support volume growth. Purchased transportation costs increased in the first quarter
of 2007 primarily as a result of volume growth, as well as an increase in the cost of purchased transportation. Fuel costs increased in the first quarter of 2007 due to higher
wages and incentive compensation. Depreciation and amortization costs increased primarily due tofuel prices; however, our fuel surcharges more than offset the
investment in our operating equipment. Purchased transportation costs decreased, reflecting increased utilizationeffect of
our equipment and drivers for interregional freight services.these higher costs.
The following table shows revenues, operating expenses, operating income and operating margin (dollars in millions) for the three-month periods ended August 31:
| | | | | | | | | | | | | |
| | | | | | Percent | | | Percent | |
| | 2005 | | 2004 | | Change | | | 2006 | | 2005 | | Change | |
Revenues | | $ | 517 | | $ | 490 | | | 6 | | | | $ | 504 | | $ | 517 | | | (3 | ) |
Operating expenses: | | | | | | | | | | |
Salaries and employee benefits | | 186 | | 182 | | | 2 | | | | 191 | | 186 | | 3 | |
Rentals | | 102 | | 102 | | | — | | | | 94 | | 102 | | | (8 | ) |
Depreciation and amortization | | 36 | | 32 | | | 13 | | | | 34 | | 36 | | | (6 | ) |
Maintenance and repairs | | 18 | | 17 | | | 6 | | | | 15 | | 18 | | | (17 | ) |
Intercompany charges | | 4 | | 3 | | | 33 | | | | 11 | | 4 | | NM | |
Other operating expenses: | | | | | | | | | | |
Supplies, including paper and toner | | 67 | | 64 | | | 5 | | | | 65 | | 67 | | | (3 | ) |
Other | | 88 | | 71 | | | 24 | | | | 84 | | 88 | | | (5 | ) |
| | | | | | |
Total operating expenses | | 501 | | 471 | | | 6 | | | | 494 | | 501 | | | (1 | ) |
| | | | | | |
Operating income | | $ | 16 | | $ | 19 | | | (16 | ) | | | $ | 10 | | $ | 16 | | | (38 | ) |
| | | | | | |
Operating margin | | 3.1 | % | 3.8 | % | | | | | | | 2.0 | % | | | 3.1 | % | | (110 | ) | bp |
Certain prior period amounts have been reclassified to conform to the current period presentation.
27
FedEx Kinko’s Segment Revenues Revenues increased by 6%decreased during the first quarter of 2007 due to declines in copy product revenues. These declines more than offset the growth in package acceptance and retail office product revenues. The declines in copy product revenues are due to decreased demand and a continued competitive pricing environment. In the first quarter of 2007, FedEx Kinko’s announced the details of a multi-year network expansion plan, including the model for new centers, which will be approximately one-third the size of a traditional center and will include enhanced pack-and-ship stations and a doubling of the number of retail office products offered. This multi-year expansion of the FedEx Kinko’s network is a key strategy relating to FedEx Kinko’s future revenue growth.
FedEx Kinko’s Segment Operating Income
Operating income decreased $6 million in the first quarter of 20062007 due mainly to the decrease in copy product revenues. Operating income was also negatively impacted by higher health insurance costs and increased costs associated with employee training and development programs, as well as other administrative expenses associated with enhancing service, adding 31 new centers and expansion planning activities to add a total of approximately 200 new centers during 2007. Rentals decreased due to continued growth in our revenues from FedEx Expressreduced equipment rentals as a result of lower copy volumes and FedEx Ground package acceptance and the benefit of the conversion of certain FedEx World Service Centers to FedEx Kinko’s Ship Centers in 2005. Growth in these areas was partially offset by a decline in our copy product line revenues.favorable lease renegotiations.
FedEx Kinko’s Segment Operating Income-35-
Operating income decreased $3 million as the increase in revenues was offset by increases in other operating expenses and depreciation. The increase in other operating expenses was primarily due to increased costs related to professional fees associated with internal technology and product offering initiatives and higher administrative costs. Increased depreciation was driven by investments in new technology to replace legacy systems over the past twelve months.
Cash and cash equivalents totaled $1.051$2.690 billion at August 31, 2005,2006, compared to $1.039$1.937 billion at May 31, 2005.2006. The following table provides a summary of our cash flows for the three-monththree month periods ended August 31 (in millions):
| | 2005 | | 2004 | | | | | | | | | |
Operating Activities: | | | | | | |
| | | 2006 | | 2005 | |
Operating activities: | | |
Net income | | $ | 339 | | $ | 330 | | | $ | 475 | | $ | 339 | |
Noncash charges and credits | | 445 | | 365 | | | 441 | | 445 | |
Changes in operating assets and liabilities | | (1 | ) | 42 | | | | (251 | ) | | | (1 | ) |
| | | | | | |
Net cash provided by operating activities | | 783 | | 737 | | | 665 | | 783 | |
Investing Activities: | | | | | | |
| | | | | | |
Investing activities: | | |
Capital expenditures and other investing activities | | (670 | ) | (391 | ) | | | (694 | ) | | | (670 | ) |
| | | | | | |
Net cash used in investing activities | | (670 | ) | (391 | ) | | | (694 | ) | | | (670 | ) |
Financing Activities: | | | | | | |
| | | | | | |
Financing activities: | | |
Proceeds from debt issuances | | | 999 | | — | |
Principal payments on debt | | (95 | ) | (13 | ) | | | (221 | ) | | | (95 | ) |
Dividends paid | | | | (28 | ) | | | (24 | ) |
Proceeds from stock issuances | | 18 | | 30 | | | 30 | | 18 | |
Dividends paid | | (24 | ) | (21 | ) | |
Net cash used in financing activities | | (101 | ) | (4 | ) | |
Other | | | 2 | | — | |
| | | | | | |
Net cash provided by (used in) financing activities | | | 782 | | | (101 | ) |
| | | | | | |
Net increase in cash and cash equivalents | | $ | 12 | | $ | 342 | | | $ | 753 | | $ | 12 | |
| | | | | | |
Cash Provided by Operating Activities.The $46 million increase in cashCash flows from operating activities
decreased by $118 million in the first quarter of
2006 was largely attributable to2007 as increased earnings
and the collection of a refund payment of $59 million from the U.S. government relating to the tax treatment of jet engine maintenance costs. We expect to receive the remaining $21 millionwere more than offset by an increase in receivables due to
us from the U.S. government in 2006. The increase in cash flows from operating activities was partially offset by the payout of previously accrued amounts relatedrevenue growth and contributions to our
2005 incentive compensationprincipal U.S. domestic pension plans.
We made tax-deductible voluntary contributions to our principal U.S. domestic pension plans of $100 million in the first quarter of 2007. On September 1, 2006, we made additional tax-deductible voluntary contributions to our qualified U.S. domestic pension plans of $382 million. On September 1, 2005, we made
tax-deductible voluntary
tax deductible contributions
oftotaling $456 million to our
principalqualified U.S. domestic pension plans.
Cash Used for Capital InvestmentsInvesting Activities. Capital expenditures during the first quarter of
20062007 were
70%4% higher than the prior year period
primarilylargely due to planned
aircraft expenditures
atfor FedEx
Express to support IP volume growth.Ground’s comprehensive network expansion. See “Capital Resources” below for further discussion.
28
Debt Financing Activities. On August 2, 2006, we filed an updated shelf registration statement with the SEC. The new registration statement does not limit the amount of any future offering. By using this shelf registration statement, we may sell, in one or more future offerings, any combination of our unsecured debt securities and common stock.
On August 8, 2006, under the new shelf registration statement, we issued $1 billion of senior unsecured debt, comprised of floating rate notes totaling $500 million due in August 2007, and fixed rate notes totaling $500 million due in August 2009. The floating rate notes bear interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 0.08%, reset on a quarterly basis. As of August 31, 2006, the floating interest rate was 5.58%. The increase in principal payments onfixed rate notes bear interest at an annual rate of 5.5%, payable semi-annually. We are using the net proceeds for working capital and general corporate purposes, including the funding of acquisitions.
-36-
During the first quarter of 2007, $200 million of senior unsecured debt primarily relates to scheduled payments on our capital leases. and $18 million of medium term notes matured and were repaid.
A
new $1.0 billion
five-year revolving credit
facility was executed in July 2005 and replaced our prior revolving credit facilities. The revolving credit facilityagreement is available to finance our operations and other cash flow needs and to provide support for the issuance of commercial paper.
Any commercial paper borrowings reduce the amount available under the revolving credit facility. At August 31, 2005, no commercial paper was outstanding and the entire $1.0 billion under the revolving credit facility was available for future borrowings. Borrowings under the revolving credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.Our revolving credit agreement contains a financial covenant, which requires us to maintain a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times rentals and landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 0.7 to 1.0. Our leverage ratio of adjusted debt to capital was 0.6 at August 31, 2006. We are in compliance with this and all other restrictive covenants of our revolving credit agreement and do not expect the covenants to significantly affect our operations or ability to pay dividends.
We also use capitaloperations. As of August 31, 2006, no commercial paper was outstanding and operating leases to finance a portion of our aircraft, facility, vehicles and equipment needs. In addition, we have a $1.0 billion shelf registration statement filed with the SEC to provide flexibility and efficiency when obtaining certain financing. Under this shelf registration statement we may issue, in one or more offerings, unsecured debt securities, common stock or a combination of such instruments. The entire $1.0 billion isunder the revolving credit facility was available for future financings.
borrowings.
Dividends.DividendsWe paid
$28 million of dividends in the first quarter of
20062007 and
2005 were $24 million
and $21 million, respectively.in the first quarter of 2006. On August
19, 2005,18, 2006, our Board of Directors declared a dividend of
$0.08$0.09 per share of common stock. The dividend is payable on October
3, 20052, 2006, to stockholders of record as of the close of business on September
12, 2005.11, 2006.
Other Liquidity Information. We believe that our existing cash and cash equivalents, cash flow from operations, our commercial paper program, revolving bank credit
facilitiesfacility and shelf registration statement
with the SEC will adequately meet our working capital and
capital expenditureinvesting activities needs for the foreseeable
future.future and finance our pending acquisitions. In the future, other forms of secured financing may be used to obtain capital assets if we determine that they best suit our needs. We have been successful in obtaining investment capital, both domestic and international, although the marketplace for such capital can become restricted depending on a variety of economic factors. We believe the capital resources available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for our future capital needs.
We have a senior unsecured debt credit rating from Standard & Poor’s of BBB and a commercial paper rating of A-2. Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. Moody’s characterizes our ratings outlook as “stable,” while Standard & Poor’s characterizes our ratings outlook as “positive.” If our credit ratings drop, our interest expense may increase. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited.
Our operations are capital intensive, characterized by significant investments in aircraft, vehicles, technology, package-handlingpackage handling facilities and sort equipment. The amount and timing of capital additions depend on various factors, including pre-existing contractual commitments, anticipated volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities.
29-37-
The following table compares capital expenditures by asset category and reportable segment for the three-month periods ended August 31 (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | | Dollar | | Percent | | | Dollar | | Percent | |
| | 2005 | | 2004 | | Change | | Change | | | 2006 | | 2005 | | Change | | Change | |
Aircraft and related equipment | | $ | 276 | | $ | 134 | | | 142 | | | | 106 | | | | $ | 302 | | $ | 276 | | $ | 26 | | 9 | |
Facilities and sort equipment | | 92 | | 97 | | | (5 | ) | | | (5 | ) | | | 101 | | 92 | | 9 | | 10 | |
Information technology | | 91 | | 81 | | | 10 | | | | 12 | | | |
Information and technology investments | | | 86 | | 91 | | | (5 | ) | | | (5 | ) |
Vehicles | | 176 | | 57 | | | 119 | | | | 209 | | | | 163 | | 176 | | | (13 | ) | | | (7 | ) |
Other equipment | | 36 | | 26 | | | 10 | | | | 38 | | | | 47 | | 36 | | 11 | | 31 | |
| | | | | | | | |
Total capital expenditures | | $ | 671 | | $ | 395 | | | 276 | | | | 70 | | | | $ | 699 | | $ | 671 | | $ | 28 | | 4 | |
| | | | | | | | |
FedEx Express segment | | $ | 388 | | $ | 165 | | | 223 | | | | 135 | | | | $ | 394 | | $ | 388 | | $ | 6 | | 2 | |
FedEx Ground segment | | 116 | | 89 | | | 27 | | | | 30 | | | | 134 | | 116 | | 18 | | 16 | |
FedEx Freight segment | | 82 | | 62 | | | 20 | | | | 32 | | | | 86 | | 82 | | 4 | | 5 | |
FedEx Kinko’s segment | | 14 | | 29 | | | (15 | ) | | | (52 | ) | | | 24 | | 14 | | 10 | | 71 | |
Other, principally FedEx Services | | 71 | | 50 | | | 21 | | | | 42 | | | | 61 | | 71 | | | (10 | ) | | | (14 | ) |
| | | | | | | | |
Total capital expenditures | | $ | 671 | | $ | 395 | | | 276 | | | | 70 | | | | $ | 699 | | $ | 671 | | $ | 28 | | 4 | |
| | | | | | | | |
Capital expenditures during the first quarter of
20062007 were
70% higher than the prior year period primarily due to
the timing of planned aircraft expenditures at FedEx Express to support IP volume growth. Also, additional investments
were made in the FedEx Ground
and FedEx Freight networksnetwork to support
growth in customer demand. For all of 2006, wevolume growth. We expect capital expenditures of approximately
$3.0 billion for 2007, compared to $2.5 billion
comparedin 2006. Much of the anticipated increase in 2007 is due to
$2.2 billion in 2005. The expected year-over-year increase will fund planned aircraft andfacility expansions at FedEx Express, vehicle expenditures at FedEx
ExpressGround to support
future IP volume growthnetwork expansions and
replace vehicles.replacement needs and the addition of new locations at FedEx Kinko’s based on their new center model. We also
plan to continue
to investinvesting in
infrastructure upgrades and productivity-enhancing technologies
and the multi-year capacity expansion of the FedEx Ground
network and growth and replacement vehicle needs at FedEx Freight.network.
Because of substantial lead times associated with the manufacture or modification of aircraft, we must generally plan our aircraft orders or modifications three to eight years in advance. While we also pursue market opportunities to purchase aircraft when they become available, we must make commitments regarding our airlift requirements years before aircraft are actually needed. We are closely managing our capital spending based on current and anticipated volume levels and will defer or limit capital additions where economically feasible, while continuing to invest strategically in growing service lines.levels.
30-38-
CONTRACTUAL CASH OBLIGATIONSAs required under SEC rules and regulations, the
The following table sets forth a summary of our contractual cash obligations as of August 31, 2005.2006. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded on our balance sheet as current liabilities at August 31, 2005.2006. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Fiscal Year | |
| | Payments Due by Fiscal Year | | | (in millions) | |
| | 2006(1) | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | | There- | | | |
| | (in millions) | | | 2007(1) | | 2008 | | 2009 | | 2010 | | 2011 | | after | | Total | |
Amounts reflected in Balance Sheet: | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 265 | | $ | 844 | | $ | — | | $ | 499 | | $ | — | | | $ | 789 | | | $ | 2,397 | | | $ | 625 | | $ | 500 | | $ | 500 | | $ | 499 | | $ | 249 | | $ | 539 | | $ | 2,912 | |
Capital lease obligations(2),(3) | | 22 | | 22 | | 99 | | 10 | | 95 | | | 130 | | | 378 | | |
Capital lease obligations(2)(3) | | | 17 | | 100 | | 12 | | 97 | | 8 | | 144 | | 378 | |
Other cash obligations not reflected in Balance Sheet: | | | | | | | | | | | | | | | | | | |
Unconditional purchase obligations(3) | | 828 | | 634 | | 400 | | 660 | | 594 | | | 866 | | | 3,982 | | | 1,003 | | 761 | | 700 | | 830 | | 596 | | 383 | | 4,273 | |
Interest on long-term debt | | 99 | | 108 | | 83 | | 83 | | 65 | | | 1,664 | | | 2,102 | | | 125 | | 118 | | 110 | | 79 | | 65 | | 1,599 | | 2,096 | |
Operating leases (3) | | 1,197 | | 1,463 | | 1,306 | | 1,141 | | 1,014 | | | 7,446 | | | 13,567 | | | 1,297 | | 1,521 | | 1,330 | | 1,150 | | 1,012 | | 6,896 | | 13,206 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 2,411 | | $ | 3,071 | | $ | 1,888 | | $ | 2,393 | | $ | 1,768 | | | $ | 10,895 | | | $ | 22,426 | | | $ | 3,067 | | $ | 3,000 | | $ | 2,652 | | $ | 2,655 | | $ | 1,930 | | $ | 9,561 | | $ | 22,865 | |
| | | | | | | | | | | | | | | | |
(1) Cash obligations for the remainder of 2006.
(2)Capital lease obligations represent principal and interest payments.
(3)See Note 7 to the accompanying unaudited consolidated financial statements.
| | |
(1) | | Cash obligations for the remainder of 2007. |
|
(2) | | Capital lease obligations represent principal and interest payments. |
|
(3) | | See Note 8 to the accompanying unaudited consolidated financial statements. |
We have certain contingent liabilities that are not accrued in our balance sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table above.
Amounts Reflected in Balance Sheet We have certain financial instruments representing potential commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including surety bonds and standby letters of credit. These instruments are generally required under certain U.S. self-insurance programs and are also used in the normal course of international operations. While the notional amounts of these instruments are material, there are no additional contingent liabilities associated with them because the underlying liabilities are already reflected in our balance sheet.
We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, non-qualified pension and postretirement healthcare liabilities and
other self-insurance accruals. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts estimated to be payable within twelve months that are included in current liabilities.
Other Cash Obligations Not Reflected in Balance Sheet The amounts reflected in the table above for purchase commitments represent
noncancelablenon-cancelable agreements to purchase goods or services. Such contracts include those for certain purchases of aircraft, aircraft modifications, vehicles, facilities, computers, printing and other equipment and advertising and promotions contracts. In addition, we have committed to modify our DC10 aircraft for passenger-to-freighter and two-man cockpit configurations, which is reflected in the table above.
31
Commitments to
-39-
purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo
transport.transport unless we have entered into a non-cancelable commitment to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements.
The amounts reflected in the table above for interest on long-term debt represent future interest payments due on our long-term debt, which are primarily fixed rate.
The amounts reflected in the table above for operating leases represent future minimum lease payments under
noncancelablenon-cancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at August 31,
2005.2006. In the past, we financed a significant portion of our aircraft needs (and certain other equipment needs) using operating leases (a type of “off-balance sheet financing”). At the time that the decision to lease was made, we determined that these operating leases would provide economic benefits favorable to ownership with respect to market values, liquidity or after-tax cash flows.
In accordance with accounting principles generally accepted in the United States, our operating leases are not recorded in our balance sheet. Credit rating agencies routinely use information concerning minimum lease payments required for our operating leases to calculate our debt capacity.
In addition, we have guarantees under certain operating leases, amounting to $36 million as of August 31, 2005, for the residual values of vehicles and facilities at the end of the respective operating lease periods. Although we expect that some of these leased assets may have a residual value at the end of the lease term that is less than the value specified in the related operating lease agreement, we do not believe it is probable that we will be required to fund material amounts under the terms of these guarantee arrangements. Accordingly, no material accruals have been recognized for these guarantees.In the future, other forms of secured financing and direct purchases may be used to obtain capital assets if we determine that they best suit our needs. We have been successful in obtaining investment capital, both domestic and international, for long-term leases on acceptable terms, although the marketplace for such capital can become restricted depending on a variety of economic factors. We believe the capital resources available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for our future capital needs.
We have a senior unsecured debt credit rating from Standard & Poor’s of BBB and a commercial paper rating of A-2. Moody’s Investors Service has assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. Moody’s and Standard and Poor’s both characterize our ratings outlook as “stable.” If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our credit ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty utilizing the commercial paper market. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to
adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and
the receipt of new or better information.
32
Information regarding our “Critical Accounting
Policies and Estimates” can be found in our Annual Report. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to pension cost, self-insurance accruals, long-lived assets and revenue recognition. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note 1 to the financial statements in our Annual Report contains a summary of our significant accounting policies.
FORWARD-LOOKING STATEMENTS Certain statements in this report, including (but not limited to) those contained in “Outlook,” “Liquidity,” “Capital
Resources,”Resources” and “Contractual Cash
Obligations” and the “Employee Benefit Plans” note to the consolidated financial statements,Obligations,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to
theour financial condition, results of operations, cash flows, plans, objectives, future performance and
business of FedEx.business. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
·
economic conditions in the domestic and internationalglobal markets in which we operate;
· the effect of Hurricane Katrina or other severe weather events on our operations and the economy, including the impact on fuel costs and availability;-40-
· any impacts on our business resulting from new domestic or international government regulation, including regulatory actions affecting aviation rights, security requirements and labor rules;
·
the impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry
of FedExor us in particular, and what effects these events will have on our costs or the demand for our services;
·
damage to our reputation or loss of brand equity;
disruptions to the Internet or our technology infrastructure, including those impacting our computer systems and Web site;
the price and availability of jet and diesel fuel;
the impact of intense competition on our ability to maintain or increase our prices (including our fuel surcharge in response to rising fuel costs) or to maintain or grow our market share;
our ability to manage our cost structure for capital expenditures and operating expenses, and match
them, especially those relating to aircraft, vehicle and sort capacity,it to shifting
and future customer volume levels;
·
our ability to effectively operate, integrate,
leverage and
leverage thegrow acquired businesses, including FedEx Kinko’s,
business;· sudden and to continue to support the value we allocate to these acquired businesses, including their goodwill;
any impacts on our businesses resulting from new domestic or international government regulation, including regulatory actions affecting global aviation rights, increased air cargo and other security requirements, and tax, accounting, labor or environmental rules;
changes in
fuel prices orforeign currency exchange
rates;·rates, especially in the Japanese yen, Taiwan dollar, Canadian dollar and euro, which can affect our sales levels and foreign currency sales prices;
our ability to defend against challenges to the status of FedEx Ground’s owner-operators as independent contractors, rather than employees;
any liability resulting from and the costs of defending against class-action litigation, such as wage-and-hour and race discrimination claims, and any other legal proceedings;
the outcome of voting by the pilots of FedEx Express to ratify the tentative four-year collective bargaining agreement reached in August 2006;
our ability to maintain orgood relationships with our employees and prevent attempts by labor organizations to organize groups of our employees, which could significantly increase our fuel surcharges in responseoperating costs;
a shortage of qualified labor and our ability to
rising fuel prices due to competitive pressures;·mitigate this shortage through recruiting and retention efforts and productivity gains;
increasing costs and the volatility of costs for employee benefits, especially pension and healthcare benefits;
significant changes in the volumes of shipments transported through our networks, customer demand for our various services or the prices we obtain for our services;
· our ability to successfully defend against challenges to our independent contractor model;
· the outcome of negotiations to reach a new collective bargaining agreement with the union that represents the pilots of FedEx Express;
·
market acceptance of our new service and growth initiatives;
· competition from other providers of transportation, e-commerce and business services, including our ability to compete with new or improved services offered by our competitors;-41-
33
·
the impact of technology developments on our operations and on demand for our
services;· disruptions to our technology infrastructure, including our computer systemsservices (for example, the impact that low-cost home copiers and Web site;
· our ability to obtain and maintain aviation rights in important international markets;
·printers are having on demand for FedEx Kinko’s copy services);
adverse weather conditions or natural
disasters;·disasters, such as earthquakes and hurricanes, which can damage our property, disrupt our operations, increase fuel costs and adversely affect shipment levels;
widespread outbreak of an illness, such as avian influenza (bird flu), severe acute respiratory syndrome (SARS) or any other communicable disease, or any other public health crisis;
availability of financing on terms acceptable to us and our ability to maintain our current credit
ratings;ratings, especially given the capital intensity of our operations; and
·
other risks and uncertainties you can find in our press releases and SEC
filings.filings, including the risk factors identified under the heading “Risk Factors” in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report, as updated by our quarterly reports on Form 10-Q.
As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.on which they are made. We are underundertake no obligation, and we expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
34-42-
Item 3. Quantitative and Qualitative Disclosures About Market Risk At August 31, 2006, we had approximately $500 million of outstanding floating-rate senior unsecured debt issued in August 2006 for working capital and general corporate purposes, including the funding of acquisitions. We have not employed interest rate hedging to mitigate the risks with respect to these borrowings. A hypothetical 10% increase in the interest rate on our outstanding floating-rate borrowings would not have a material effect on our results of operations. As of August 31,
2005,2006, there had been no
other material changes in our market risk sensitive instruments and positions since the disclosure in our Annual Report. While we are a global provider of transportation, e-commerce and business services, the substantial majority of our transactions are denominated in U.S. dollars. The distribution of our foreign currency denominated transactions is such that foreign currency declines in some areas of the world are often offset by foreign currency gains
of equal magnitude in other areas of the world.
OurThe principal
exposure to foreign currency exchange rate risks
isto which we are exposed are in the Japanese yen, Taiwan dollar, Canadian dollar and euro. Foreign currency fluctuations during the three-month period ended August 31,
20052006 did not have a material effect on our results of operations.
We have market risk for changes in the price of jet and diesel fuel; however, this risk is largely mitigated by
revenue from our fuel surcharges. However, our fuel surcharges have a lag that exists before they are adjusted for changes in fuel prices and fuel prices can fluctuate within certain ranges before resulting in a change in our fuel surcharges. Therefore, our operating income may be affected should the spot price of fuel
continue to fluctuatesuddenly change by
a significant
amountsamount or change by amounts that do not result in a change in our fuel surcharges.
Item 4. Controls and Procedures The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of August 31,
20052006 (the end of the period covered by this Quarterly Report on Form 10-Q).
During our fiscal quarter ended August 31, 2005,2006, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of all material pending legal proceedings, see Note 9 of the accompanying consolidated financial statements.
Item 1A. Risk Factors
On August 26, 2006, FedEx Express and the union that represents the pilots of FedEx Express reached a tentative agreement on a new four-year collective bargaining agreement. The new agreement is subject to ratification by the pilots. Otherwise, there have made certainbeen no material changes from the risk factors disclosed in our policiesAnnual Report (under the heading “Risk Factors” in “Management’s Discussion and proceduresAnalysis of Results of Operations and Financial Condition”) in response to ensure our accountingPart I, Item 1A of Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
At the FedEx Corporation annual meeting of stockholders held on September 25, 2006, FedEx’s stockholders took the following actions:
The stockholders elected fourteen directors, each for leases isa one-year term. The tabulation of votes with respect to each nominee for director was as follows:
| | | | | | | | |
Nominee | | For | | | Withheld | |
Frederick W. Smith | | | 277,393,999 | | | | 5,857,411 | |
James L. Barksdale | | | 254,669,693 | | | | 28,581,717 | |
August A. Busch IV | | | 279,289,785 | | | | 3,961,625 | |
John A. Edwardson | | | 279,306,801 | | | | 3,944,609 | |
Judith L. Estrin | | | 276,072,238 | | | | 7,179,172 | |
J. Kenneth Glass | | | 278,063,467 | | | | 5,187,943 | |
Philip Greer | | | 277,321,385 | | | | 5,930,025 | |
J.R. Hyde, III | | | 276,490,900 | | | �� | 6,760,510 | |
Shirley A. Jackson | | | 277,804,310 | | | | 5,447,100 | |
Steven R. Loranger | | | 280,134,422 | | | | 3,116,988 | |
Charles T. Manatt | | | 280,079,815 | | | | 3,171,595 | |
Joshua I. Smith | | | 277,439,719 | | | | 5,811,691 | |
Paul S. Walsh | | | 278,810,864 | | | | 4,440,546 | |
Peter S. Willmott | | | 250,759,295 | | | | 32,492,115 | |
The stockholders approved the adoption of amendments to FedEx’s Amended and Restated Certificate of Incorporation, as amended, and Restated Bylaws to eliminate all supermajority voting requirements by a vote of 275,652,470 for and 1,689,235 against. There were 5,909,705 abstentions. The Board of Directors has restated FedEx’s Amended and Restated Certificate of Incorporation, as amended, and Restated Bylaws to reflect the simple majority vote amendments. The resulting Second Amended and Restated Certificate of Incorporation has been executed, acknowledged, filed and recorded in accordance with generally acceptedthe Delaware General Corporation Law and is attached to this Report as Exhibit 3.1. The resulting Amended and Restated Bylaws are attached to this Report as Exhibit 3.2.
The Audit Committee’s designation of Ernst & Young LLP as FedEx’s independent registered public accounting
principles.35
firm for the fiscal year ending May 31, 2007 was ratified by the stockholders. The tabulation of votes on this matter was as follows:
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit
Number • |
| 279,620,062 votes for |
• | | 1,791,986 votes against |
• | | 1,839,362 abstentions |
• | | There were no broker non-votes for this item. |
A stockholder proposal requesting that the Board of Directors report on the scientific and economic analyses relevant to FedEx’s environmental policy concerning greenhouse gases was not approved by stockholders. The tabulation of votes on this matter was as follows:
• | | 11,866,241 votes for |
• | | 201,298,753 votes against |
• | | 36,949,949 abstentions |
• | | 33,136,467 broker non-votes |
A stockholder proposal requesting that the Board of Directors take the necessary steps to amend FedEx’s governance documents to provide that each director nominee be elected by the affirmative vote of a majority of votes cast at an annual meeting of stockholders was not approved by stockholders. The tabulation of votes on this matter was as follows:
• | | 111,420,718 votes for |
• | | 132,447,517 votes against |
• | | 6,246,708 abstentions |
• | | 33,136,467 broker non-votes |
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Item 6. Exhibits
| | |
Exhibit | | |
Number | | Description of Exhibit |
|
|
3.1 | | | | Second Amended and Restated Certificate of Incorporation of FedEx Corporation. |
| 12.1
| |
3.2 | | Amended and Restated Bylaws of FedEx Corporation. |
| | |
10.1 | | Seventh Addendum dated July 31, 2006 to the Transportation Agreement dated January 10, 2001, as amended, between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
| | |
10.2 | | Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
| | |
12.1 | | Computation of Ratio of Earnings to Fixed Charges. |
| 15.1
| |
15.1 | | Letter re: Unaudited Interim Financial Statements. |
| 31.1
| |
31.1 | | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2
| |
31.2 | | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1
| |
32.1 | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2
| |
32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
-45-
36
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FEDEX CORPORATION
| | | |
| FEDEX CORPORATION
| |
Date: September 23, 200525, 2006 | /s/ JOHN L. MERINO | |
| JOHN L. MERINO | |
| CORPORATE VICE PRESIDENT |
| PRINCIPAL ACCOUNTING OFFICER
| |
|
37-46-
EXHIBIT INDEX
Exhibit
Number
|
| |
Exhibit | | |
Number | | Description of Exhibit |
|
|
3.1 | | | | Second Amended and Restated Certificate of Incorporation of FedEx Corporation. |
| 12.1
| |
3.2 | | Amended and Restated Bylaws of FedEx Corporation. |
| | |
10.1 | | Seventh Addendum dated July 31, 2006 to the Transportation Agreement dated January 10, 2001, as amended, between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
| | |
10.2 | | Transportation Agreement dated July 31, 2006 between the United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
| | |
12.1 | | Computation of Ratio of Earnings to Fixed Charges. |
| 15.1
| |
15.1 | | Letter re: Unaudited Interim Financial Statements. |
| 31.1
| |
31.1 | | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2
| |
31.2 | | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1
| |
32.1 | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2
| |
32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
E-1E-1